According to Bloomberg, J.P. Morgan, Bank of America Merrill Lynch, Goldman Sachs and other investment banks are considering slashing bonuses by up to 30% in 2022. In addition, a number of banks are starting to reduce headcount in an effort to address the challenging market conditions.
Annual Bonuses at Risk
Historically high inflation, Federal Reserve interest rate hikes, and general uncertainty over macro and geopolitical events have contributed to a slowdown in IPOs and other deal-making activities in 2022. In fact over the first 11 months of 2022, only 70 new IPOs were priced in the US, 82% below the number of new deals that were priced during the same period last year.
Through the first nine months of 2022, investment banking fees have been down 32% compared with the same period last year to $83.1 billion. Equity underwriting fees were particularly weak in the first nine months, down by 67% year over year, with debt underwriting fees down by 28% and M&A fees down by 19%.
The largest five United States investment banks saw their revenue fall by nearly 50%, representing about $19 billion during the last three quarters of 2022. The decline in mergers and acquisitions, deal-making activities, and initial public offerings have prompted management to reconsider paying big bonuses.
Compensation management experts expect that incentive pay at most investment banks may fall by more than 45%. There is also a fear that some low performers will not receive any bonuses during 2022.
Investment Bank Layoffs also Loom
As a result of these tough conditions New York City-based investment bank Goldman Sachs says they plan to cut as many as 4,000 employees in the next few months as the bank struggles to meet profit targets. Morgan Stanley, on the other hand, is said to be planning to cut about 2% of its global workforce — roughly 1,600 people according to some news agencies.
Other major banks including Citigroup, and Barclays, have laid-off bankers who were said to be under performing. J.P. Morgan is also reportedly downsizing at the end of the year, allowing attrition without replacement and lower bonus payouts. Though most bank executives are pessimistic about the business prospects for 2023, Wall Street executives aren’t sure how bad the economy will get, and are proactively pulling back on staffing to get ready.
The following chart shows some announced job cuts by Wall Street investment banks over the past few months.
Wall Street Job-Cut Tracker
Overall revenue for the 10 largest US and European investment banks in 2022 is set to easily exceed pre-pandemic levels as the boom in equities and fixed income trading has more than made up for the drop in other fees. As you can see from the chart below, the real weakness in revenue for the largest Wall Street firms is in investment banking fees which have plummeted from 2021 levels.
This plunge investment banking revenue is already leading to layoffs at most Wall Street investment banks, and is likely to lead to much smaller than expected bonuses for many investment bank professionals. The big question is whether these conditions will lead to an exodus of talent from Wall Street firms in 2023.