FICC restructuring 'inevitable' at second tier banks

Matt Turner
15 Jun 2011

A restructuring of the fixed income, currencies and commodities divisions at UBS, Morgan Stanley and Credit Suisse is inevitable, according to JP Morgan analysts, as compensation regulation is leading to a high fixed cost base in a business with volatile revenues.

In a note published yesterday, JP Morgan analysts led by Kian Abouhossein said that compensation regulation had meant that a restructuring of investment banks with a "tier two" fixed income, currencies and commodities franchise was now inevitable. The note said: "Increased regulation of employee bonus compensation has triggered increasing salaries and led to a higher proportion of deferred compensation levels leading to a concerning highly fixed cost base for a volatile revenue business." Job cuts are a likely result of the reduced flexibility, according to the note, as banks are forced to cut staff rather than simply reduce the bonus pool, which pre-crisis made up a greater proportion of the cost base. Financial News reported on Monday that a sharp drop in trading in the past few months and a slowdown in investment banking activity has raised concerns among senior executives in the industry that banks will have to cut thousands of jobs. The reduced flexibility during the downturn is likely to impact the banks with what JP Morgan identifies as "tier two" franchises in FICC, such as Credit Suisse, Morgan Stanley and UBS. The note said: "This puts tier two players which lack revenue scale particularly in FICC in a very tight spot in our view, and hence we believe at some point the management of these tier two investment banks will

have to think about restructuring their FICC businesses." UBS in particular needs to address the issue of restructuring its FICC division, according to JP Morgan, with the bank's clean, or underlying, FICC revenues in 2010 less than half those at Goldman Sachs, Deutsche Bank, Citigroup and Bank of America Merrill Lynch. Despite that, UBS remains JP Morgan's top global investment bank pick, primarily because of the potential for a turnaround in its wealth management division. The note also queried the high cost per head in the investment banking division at Credit Suisse, saying they expect Credit Suisse to "think about restructuring its tier two FICC business in the near future". Morgan Stanley meanwhile is still yet to see a substantial increase in FICC revenues until now, despite plans to increase market share, according to the note. Conversely, BNP Paribas is mentioned as a "best in class example" of the tier two FICC "light" model -a client-focused flow business structure with lower costs per head than the likes of Credit Suisse. Credit Suisse, UBS and Morgan Stanley declined to comment. -- write to matthew.turner@dowjones.com

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