NEW YORK: Wall Street firms must cut more jobs to boost their return on equity and satisfy shareholders, said Meredith Whitney, a banking analyst and founder of Meredith Whitney Advisory Group.
“The biggest layoffs are ahead of us,” Whitney said in a Bloomberg Television interview on July 26 with Tom Keene, Sara Eisen and Scarlet Fu. “It’s no fun, it’s painful but you have to downsize dramatically, get more efficient on every single line of business.”
The six largest US banks reported US$43.3 billion in total first-half profit, the most since 2007, as revenue climbed for the first time in four years. Lenders including Citigroup and Morgan Stanley, both based in New York, are leaning on expense savings from job cuts to improve profits, announcing plans in the first three months of this year to eliminate about 21,000 positions, or 1.8 per cent of their combined workforce, according to data compiled by Bloomberg.
Whitney said last July in a Bloomberg TV interview that the banking industry would probably need to shed an additional 50,000 jobs to bring headcounts in line with revenue.
Even as second-quarter net income helped increase the biggest US banks’ return on equity (ROE), a measure of profitability watched by shareholders, most remained historically low. ROE frequently exceeded 20 per cent at banks including Goldman Sachs and Morgan Stanley before 2008.
Wells Fargo’s normalised ROE rose to 14 per cent in the second quarter, the highest since the three-month period to September 2008, according to data compiled by Bloomberg, and JPMorgan reported 13 per cent. Citigroup’s rose to 7.2 per cent, the highest since the third quarter of 2007, while Morgan Stanley was at 4.4 per cent and Goldman Sachs posted a ROE of 10.5 per cent.
“So many of the banks are struggling with very low ROEs and the shareholders are not going to stand for it,” Whitney said. “This is not the type of returns on capital that investors are going to pay for.”
Whitney said she doesn’t see opportunities for firms to improve ROE through increased revenue alone, making cost-cutting inevitable.
“There’s only one way because, structurally, the revenues can’t move the needle,” Whitney said. “It has to come from expenses.”
Evercore Partners’s Ralph Schlosstein, speaking in the same interview, agreed that downsizing and improving efficiency are necessary to improve the biggest banks’ low rates of return.
“Substituting technology for people, that’s going to happen across the board,” said Schlosstein, the New York- based advisory firm’s chief executive officer.
(BLOOMBERG)