Tailoring banks to suit tougher times

ONE OF THE more tongue-in-cheek theories doing the rounds in the Square Mile offers an explanation for the fashionable return of business suits: they make their wearers look busy. And in the under-worked corporate finance departments of today's investment banks, this is a huge benefit. Where casual dress once indicated a banker was part of the scene, it is now seen as evidence that he has no client meetings that day. The suit revival has become symbolic of the fact that being seen to be busy is now a key part of the banker's craft.

For their employers there is also a fast-eroding line between a favourable perception and deception. Despite widespread reports of job losses among merger and acquisition staff, initial public offering specialists and equity traders, not many London banks admit to having fewer people on their payroll than a year ago.

These are not the dark days for bankers that many would have you believe, they say. Sure, conditions are not as buoyant as two years ago, but here at XYZ Bank, we are actually doing quite well, with staff numbers in line with this time last year. CSFB chief executive John Mack was a little more open than most on Tuesday, confirming more job losses were on the way at his firm. 'I am confident that we will be taking more heads out of investment banking,' he said.

But most of his peers deny that any jobs have been, or are about to be, cut. And it is hard to dispute their figures. In fact, it is impossible. Ignoring their own analysts' calls for greater corporate transparency, many of the banks refuse to separate their London staff numbers from the global figures and none will say how many they employ in various departments.

Their refusal to break down numbers masks the fact that some overall headcounts are steady thanks only to last year's bumper profits in the fixed income divisions. Booming demand for bond issues to take advantage of low interest rates has prompted many banks to employ 200 or more people each in the past year to maximise profits from syndicated loans and debt restructures.

These have offset the heavy redundancies among IPO and mergers and acquisition staff, though few will admit it. They also argue the lower cost bases revealed in their recent profit results reflect moves to replace highly-paid staff with cheaper versions, rather than a reduced headcount.

But there are grave doubts about how long the banks can keep up this facade. Those who dismiss talk of a second-half turnaround in corporate activity - and this is a growing band - also believe leading investment banks will be forced to cut staff numbers. The most bearish followers are even predicting a poor second half will cause many banks to ask themselves much more fundamental questions about their structures, overheads and general reasons for existing.

Headhunters estimate 30,000 jobs have been lost in the City since the terror attacks on the US on 11 September in addition to a similar number that were culled following the dotcom crash.

Doug McWilliams, chief executive of the Centre for Economic and Business Research, sees more cuts, though the outlook for City workers has started to improve. 'In terms of the rate of job losses the worst is over,' he said. 'But the chances are there are more to come.'

Jonathan Baines, chairman of the financial services group at headhunters Whitehead Mann, said that despite talk of an economic recovery, chief executives were still showing little or no appetite for corporate transactions. 'Investment banks have a real dilemma,' he said. 'This has been going on for almost two years and it is as serious as it has been in a decade. If you doubt there is going to be a pick-up then you have to accept the potential for further restructuring and cost-cutting is quite high.

'In that circumstance, these banks would still be over-staffed and overcosted. People are now looking at the investment banking model and asking How do we make money? and How do we pay these bankers? There are fundamental question marks over what works and what doesn't.'

Merrill Lynch has been wearing its staff cuts like a badge of honour, obviously believing it signals to shareholders that the bank has their financial plight at the front of its mind. Its worldwide payroll now has 57,000 names compared with 72,000 a year ago. Merrill will not say how many of these are based in Britain.

While its European operations generate 20% of revenue, many of the cuts are known to have been made in its US retail banking arm, suggesting the number of job losses in Britain is probably closer to 1,000 than 3,000.

Goldman Sachs is expected to follow as early as next week with an announcement that up to 2,000 of its global staff, including many in London, will be made redundant.

Schroders, the only remaining independent blue-blooded bank in the City, is in the throes of cutting its payroll from 3,117 to 2,500. It said most of those who leave will be re-employed by the companies that will take on much of the bank's backroom work. However, the move still reflects a need to cut costs quickly.

Morgan Stanley has increased its London staff by about 200 in the past year, taking it to 5,200. A spokeswoman said gains in the fixed income and equity sales areas had offset losses in other other divisions, namely IPO and M&A.

Deutsche Bank and UBS Warburg say their London staff numbers have remained around 11,000 and 6,000 respectively in the past 12 months. CSFB also has about 6,000, though it admits this is the result of having pruned the list by almost 10%.

But while the changes in staff numbers have varied significantly, there is no disagreement over the dire state of trading so far this year. With most also agreeing that bond markets will not get close to a repeat of the bumper times enjoyed last year, further job cuts appear increasingly inevitable.

'The first quarter is usually one of the busiest for IPOs,' said one banker. 'There has been hardly anything this year and while there are deals building up in the pipeline, no one is actually going forward yet.'

Another banker pointed to the recent failed attempt at a block trade in Vivendi stock by Goldman and Deutsche as proof of how tough conditions are. 'People would have said Goldmans are one of the leaders in block trades and they ended up with an investment position. That would have knocked others a bit.'

But perhaps the last thought should be given to Cazenove, that most blue-blooded member of the City. Cazenove maintains that it remains on track for a share market float this year, provided 'market conditions are right'.

The way conditions are looking, this is a battle it cannot win. Cazenove either suffers the humiliation that comes with an investment bank having to abort its own float, or transmits a very strange signal to clients about its view of what constitutes a 'right' market.