New York – Equity analysts, highly expendable during the financial crisis, are now back in demand. Investment banks in New York and London are reportedly hiring equity analysts, despite mixed results for cash equities. The hiring spree partly results from new entrants, as well as improved prospects for new securities issuance.
Investment banking is notoriously cyclical. Banks have always tended to over-hire in good times and cut drastically in bad times. Equity analysts are not exempt from the banks’ manic depressive hiring swings, as recruiting for equity research often follows a LIFO policy (last in and first out). During bad times, banks view equity research as deadweight overhead sucking profits from more critical activities, and then, during good times, equity research becomes a strategic asset which is critical to the franchise, and bankers run out and buy ranked analysts at a premium.
We seem to be now in that period where banks are shifting their view of equity research from unloved cost center to critical success factor. As a consequence, hiring of analysts is resuming. If analysts were publicly traded, their P/E ratios would be rising.
According to an article in the online Wall Street Journal, Royal Bank of Scotland (RBS) plans to hire around 15 research analysts in London this year, having already hired 15 analysts since September 2009. Headhunters in London say that Citigroup, Credit Suisse, Deutsche Bank and Morgan Stanley, are looking to increase headcount or hire selectively. Barclays Capital is also on the prowl, although if they follow their successful US playbook, they will be looking to hire young talent rather than ranked analysts.
Ben Uglow, a ranked UK capital goods analyst that set up his own boutique in Oxford last spring, is rumored to be joining Morgan Stanley in London. Morgan Stanley is also tiptoeing back into ESG research, hiring former Lehman Brothers analyst Nick Anderson and Kristina Obrtacova from Goldman Sachs. ESG research was decimated by investment banks during the financial crisis.
As we reported last week, Nomura has aggressive plans for expanding its US equity research capabilities. Nomura Securities reportedly will add almost 100 people in equity research this year, including about 20 publishing analysts. Last month it hired Bank of America Corp.’s Michael Rietbrock as head of U.S. equity research in New York and David Puritz, formerly the head of U.S. convertible bond trading at Deutsche Bank AG, to run the business in New York.
What is prompting this renewed interest in hiring equity research analysts? Well, it is not booming cash equity results. We think investment banks are under continued pressure from trading volumes as market volatility has declined from last year. Even worse, their buy side clients are using electronic trading and CSAs to reduce the volume of bundled commission payments, hurting the profitability of cash equities further.
A quote is instructive here. As quoted in the Wall Street Journal, Sam Dean, London co-head of equity capital markets at Barclays Capital: “If you have research analysts that both investors and corporates recognise as being independent and top class, that in itself can help to generate business for the investment bank.” Translation: equity research analysts are in demand because of the increase in investment banking activity. One must be discreet about saying this, because in the US, post Eliot Spitzer, it is a no-no to link equity research with banking. And technically, research commissions aren’t supposed to pay for access to IPO offerings. We can expect, however, that as new issuance continues to improve, the fortunes of investment bank equity research will improve also. That’s the nature of the game as it is played on Wall Street.