Reasons to be cheerful

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The worst run on the banking system in living memory, US banks expected to take big 3Q hits... but it's really not so bad.

At least, this is the opinion of analysts, who think the banking downturn in 2002 was infinitely worse.

"What we have now is a fixed-income problem," says Brad Hintz, banking analyst at Sanford Bernstein in New York. "This is not a widespread downturn that will prompt broad job cuts across Wall Street banks. It's a re-pricing problem, and I'd expect it to take two quarters to resolve."

Kinner Lakhami, a banking analyst at ABN AMRO in London, confirms the cheerful prognosis. "In 2002 we were in a recession, the effect of which was a very high default rate of 11% to 12% which permeated most lines of the capital markets business. Right now, default rates are around 1% to 2% and we'd expect them to rise to 3% over the next 12 months. We're still a far cry from five years' ago."

While 2002 saw job cuts across all areas of the brokerage business, Hintz predicts redundancies this time around will be restricted to sub-prime mortgages and collateralised debt obligations (CDOs). Simon Adamson, an analyst at CreditSights in London, says some business areas (foreign exchange, commodities, rates, equity derivatives) may even be doing rather well out of the credit crisis. Lehman's 3Q results appear to bear this out - yes the Brothers lost a not inconsequential $950m on fixed income trading, but revenues from equity trading, underwriting and advisory work all rose.

On a bleaker note... Adamson says banks' emphasis on fixed income means the credit crunch could have a disproportionate effect on revenues. "Fixed income is a major part of most investment banks' operations these days - for a lot of them, it's bigger than M&A. We could see some big damage to banks' results in the third and first quarters."

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