Morgan Stanley, the fifth-largest bank in the world, announced a year-end round of efficiencies that will result in approximately 1,500 job cuts, or roughly 2% of the company’s workforce. The world’s biggest equities trading firm will concentrate on technology and operations positions. Despite a 29% gain in share price this year and better-than-expected corporate earnings, Morgan Stanley is seemingly preparing to weather the economic storm clouds. Ostensibly, so is everyone else.
Pinching Pennies
Bloomberg News is out with a new analysis that does not portray the financial sector in a positive light among chief critics of the banking system. According to the report, more than 50 banks from around the world eliminated 77,780 jobs in 2019, the most since 2015 when the industry cut 91,448 positions.
Using filings by the companies and labor unions, Bloomberg listed the name in this year’s job losses:
- Deutsche Bank: 18,000
- Unicredit: 8,000
- Santander: 5,400
- Commerzbank: 4,300
- HSBC: 4,000
- Barclays: 3,000
When you factor in the 2019 reductions, there have been more than 425,000 job cuts in the last six years. However, this figure might be a lot larger because a lot of organizations do not publicly disclose their plans. Next year might not be any different as most experts anticipate additional payroll shedding.
So, what is happening? Aren’t the big banks making more money than ever before? Wasn’t President Donald Trump and the Republicans’ corporate tax cut meant to create jobs? Well, it might be politically expedient to blame Trump and the GOP, but the primary culprit is Europe, the capital of Lost Cause Ville.
Losing Interest in Europe
Banks in Europe account for more than 80% of the culling. When you consider the conditions across the pond, it makes sense why they are the lambs being led to the slaughter.
Since the global economic collapse, Europe has failed to recover. Although there are pockets within Europe that record admirable numbers on occasion, the region has mostly been a lost cause. When you toss sliding exports and international trade conflict into the mix, you have a prevalence of disappointment. Despite the European Central Bank (ECB) and sovereign central banks instituting unconventional monetary policies, such as quantitative easing and subzero interest rates, growth has been relatively stagnant.
As a result, European banks are reporting substantial weakness. The main thing for these entities is that historically low rates are imbibing their lending revenues, causing them to trim payroll numbers, sell businesses to reach profitability, and employ other cost-cutting measures.
And then there are the many other hazards bubbling underneath the surface. One of these is non-performing loans (NPLs), loans for which payments on the principal or interest have not been made for while.
Today, there is about $1 trillion worth of NPLs in the eurozone. Although this is down from roughly $1.6 trillion at the peak of the financial crisis, it remains an astronomical figure, especially when you comb through the specifics. For example, real estate accounts for about 40% of their NPL books. This was a contributing factor to Europe’s economic meltdown a decade ago, but it will still linger in the coming decade, analysts warn.
The other problem for European banks, compared to their American counterparts, is efficiency. European institutions are famous for embarking upon cost-cutting journeys at a snail’s pace. Typically, the cost-to-income ratio for these companies is below 50%. In Europe, more than two-thirds have ratios exceeding 60%.
A single sentence penned by The Economist summarized the plight of Europe’s financial sector: “Is there any more miserable spectacle in global business than that of Europe’s lenders?” Let the zombification commence and persist!
Banking on Fintech
Are the thousands of individuals impacted by the restructuring out of luck? Well, aside from trying to find work within the sector, there is another budding industry that is offering a wealth of opportunities.
Financial technology is projected to become a $305 billion market by 2023. Today, 39 fintech unicorns – tech startups with a valuation of $1 billion or more – have a cumulative value of $147.37 billion. The total number of workers in the industry is unclear, but to get a rough estimate of how immense the market is, the United Kingdom’s fintech sector employs roughly 80,000 people. Overall, nearly 90% of banks say they will lose parts of their business to standalone fintech companies in the next five years.
When even Uber is trying to make a play in fintech, you know the conventional system we have become accustomed to is under threat. And that is a good thing.
Betting on Market Forces
The titans of Wall Street appear to be making more money than ever before. If you invested in any of these juggernauts when the market bottomed out a decade ago, you have made a significant return on your investment. Despite first dibs on the central bank spigot and access to a stream of easy money, these institutions will not survive a financial crisis. Profit margins are thinning, revenues are slowing, loan growth is anemic, and the landscape is evolving thanks to fintech. We may party like it is 2006, but we will inevitably bail out banks like it is 2008.
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Read more from Andrew Moran.
