Morgan Stanley has cut 1,200 people from its fixed-income unit and back office support for that business, following the bank’s worst quarter for bond trading since the financial crisis.
Tougher capital rules, a drop in client activity and a shift toward electronic trading have squeezed profits in parts of fixed-income, currencies and commodities (FICC) units, forcing most banks to pull back and trim staff.
But Morgan Stanley, which had cut its trading inventories in half over recent years, suffered a bigger drop in net revenues during the third quarter than any other bank, prompting investors to call for swifter, deeper measures.
On Tuesday the bank said it would cut 470 people from the FICC unit — equivalent to about one quarter of headcount — ranging from senior managing directors to junior analysts, from offices all over the world. It also said it would cut another 700 or so positions from back office support functions for the FICC unit, incurring one-off charges of $150m in total.
An internal memo from Colm Kelleher, head of the institutional securities business, and Ted Pick, head of global sales and trading, said the staff reduction would “result in businesses that are critically and credibly sized for the current market”.
The cuts come as the latest blow to FICC businesses at the top Wall Street banks, which have been hit by a combination of structural and cyclical drags since the financial crisis. Last year’s global FICC revenue pool of $118bn was 46 per cent lower than in 2009, according to Coalition, a consultancy.
Addressing analysts after third-quarter earnings in October, chief executive James Gorman promised an “intense focus” on underperforming parts of the bank, including FICC, as weaker bond trading reduced profits for the period by 40 per cent.
Since taking over as chief executive in 2010 Mr Gorman has pursued what he calls a “balanced” business model, where the consistency of wealth management and investment management revenues offset the potential instability of the institutional securities division.
That effort involved paring back the FICC business, bringing risk-weighted assets down by more than $200bn to about $160bn and selling several commodities businesses.
But the swings in FICC revenues have been so sharp over the past year or so — falling from $1.4bn in the first quarter to $1.1bn in the second, then to $600m in the third — that investors have challenged Mr Gorman to take more drastic action.
Mike Mayo, analyst at CLSA, said that the latest cuts were a smart move, describing Morgan Stanley’s FICC business as a “lousy” adjunct to the successful equities and investment banking units.
He said that several investors had contacted him after he put out a lengthy research note last month on the bank, expressing concern over the scale and profitability of the FICC business.
FICC revenues in the third quarter, down from $1.1bn in the second quarter
Senior insiders at Morgan Stanley say that the Volcker ban on proprietary trading had made FICC activities more treacherous, exposing banks to the risk of holding assets that all their clients have dumped. “No one wants to be left with inventory that falls out of bed,” said one.
Glenn Schorr, an analyst at Evercore ISI, said that he wanted more detail on which parts of the FICC business would be affected after the cuts, but said that Tuesday’s announcement was evidence that the bank is “going about it in an intelligent, methodical manner”.
The bank has indicated that it will give more detail at its full-year results presentation in January.
In October, Mr Gorman had handed control of the FICC unit to Mr Pick, a 46 year-old former head of equities, whose division saw another strong quarter.
The role Mr Pick has been asked to play is akin to an “internal activist,” said Mr Mayo. “FICC is sick.”
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