Banks need to be ‘very careful’ about job cuts

With recent decrease in dealmaking in the UK and the US, the head of JPMorgan’s investment bank said banks need to be “very careful” about making deep cuts to dealmakers, even as fees slump and rival bank Goldman Sachs began laying off.

CEO of JPMorgan’s corporate and investment bank, Daniel Pinto, said: “Cutting bankers here and there” during a downturn in dealmaking is not the right approach and that it could “hurt the possibility for growth going forward”.

He told the Barclays financial services conference: “If anything, in an environment like this there may be some very, very top bankers that you could not access in the past and are now available for hire.” He further said he expected JPMorgan’s investment banking fees in the third quarter to be down by 45 per cent to 50 per cent on 2021.

And added that he expected investment banking fees to “normalise” around 2020 levels in the coming years, rather than swelling back to the highs of last year when banks hauled in $130 billion.

Banks need to have a longer term view, Pinto said. “They are clients of JPMorgan, but at the same time the banker’s relationships play a very big role.” His comments came as rival Goldman Sachs was set to role out its first job cuts in two years by reinstating its annual cull of underperformers that typically sees between 1 per cent and 5 per cent of bankers depart.

Banks are expected to roll out more cuts this year. Dealmaking fees have fallen by 39 per cent, according to data provider Dealogic. However, Pinto did not rule out job cuts entirely, saying that JPMorgan would need to “adjust this year or next year the structure of the business to the potential of that business”.

“The banking business has a big component of variable compensation, so therefore you can adjust by just not letting people go, you can adjust by reducing comp,” he added. And further stated that bonuses for dealmakers “will be adjusted” down this year, but not necessarily by the amount that fees have fallen.

“Last year we didn’t pay 100 per cent of the underperformance,” he said. “Neither this year are we going to reduce compensation by 100 per cent of the underperformance. JPMorgan made $1.7bn from investment banking fees in the second quarter, down 54 per cent on 2021.

Headcount within its corporate and investment bank was 69,447 in the second quarter – an increase of around 5,200 people on the same period in 2021. Compensation costs in the unit were $3.5bn, a decline of 5 per cent until October this year.

Pinto said: “Businesses will need to prepare for lower growth, tighter capital and significant market volatility in the coming months. As profit warnings and stress levels rise, we’re starting to see more companies issue multiple profit warnings.” With private equity commitments, investors have plenty of reasons to stay the course, despite challenges such as rising inflation, higher interest rates and political polarisation.

Head of private equity at Guardian Life Insurance Company of US, which ended 2021 with $10.7bn in capital, Maurice Gordon, said: “We do want to keep investing through this cycle, as it’s proven out time after time after time that that’s a proven strategy.” He added that his organisation is willing to “hold the course” on its private equity investments.

Gordon and private equity experts have discussed how they have been managing their commitments to the asset class in the face of market challenges and a crowded fundraising environment. They are confident that private equity will still outperform the public markets. “I had a boss many years ago who said: ‘Maurice, if you can’t beat (the public markets), find a new job,” Gordon said.