Banker Job Cuts Will Be Back, Sooner or Later

(Bloomberg Opinion) -- The rat-a-tat of banks in the U.S. and Europe pledging not to cut jobs in the midst of the coronavirus pandemic will be a relief to those inside and outside the industry as the world economy crumbles. For many bankers, though, the respite will be no more than temporary.

As governments race to prop up companies and individuals with financial aid, lenders are critical to the transmission of these policies. It will be up to them to delay mortgage and loan payments and hand out state-backed loans to millions of customers. That will determine the extent to which economies can mitigate the slump as businesses battle to survive through the lockdowns. Bank of America Corp. — at one point the target of social media ire over its customer payment terms — has moved thousands of employees to its consumer and small business units to deal with the crisis, including bringing in temporary external hires.

Unlike the crisis of 2008, the stresses on markets and the economy are not of banks’ making but they could be as severe. Policymakers have rushed through stimulus and eased lenders’ capital requirements to soften the blow. As they grapple with the operational challenge of fielding a volume of customer calls running as high as 10 times normal levels, now is not the time for layoffs. As regulators have said, buybacks and dividends must go first.

Yet the pressure on bank jobs and other costs won’t go away in the medium term. Even the better-placed lenders, which have prospered from the recent spike in market trading activity, will be affected by the economic carnage of the next few months. Deutsche Bank AG, which has paused staff cuts in the middle of its biggest restructuring in decades, on March 18 said the positive business momentum in the fourth quarter of 2019 — in which trading was prominent — carried over into start of 2020. Two days later, it warned it “may be materially adversely affected by a protracted downturn.”

From their markets businesses to lending and commissions from investment products, analysts expect all banks to suffer a drop in revenue and an inevitable build-up of bad loans that will erode profit. Record low interest rates will keep squeezing loan margins and appetite for new investments will almost certainly remain subdued for some time.

Some analysts are starting to try to asses the financial hit. A Berenberg study of 38 European and U.S. banks estimates an overall revenue decline of 8.5% in 2020 and earnings 30% below what was expected for 2020. There’s only so much policymakers can do to shield financial firms.

Europe’s banks, which were struggling to generate sustainable profit even before the latest crisis, will feel most acutely the pressure to shore up capital. This will create the conditions for more mergers.

The cost-to-income ratio at the region’s top banks averaged 66.9% in 2019, the highest level since the financial crisis. Return on equity, a measure of profitability, dropped to 8.7%, the lowest in three years, Bloomberg Intelligence data show. Moody’s has downgraded the credit outlook for banks across France, Italy, Spain, Denmark, the Netherlands and Belgium to negative because the operating environment will “deteriorate significantly.” The ratings company already had negative outlooks for British and German banks.

As well as the relentless squeeze on profit and costs, there’s another key factor that doesn’t bode well for bank jobs once the current environment ends: the sudden shift to digital banking during the pandemic. Banks are operating with only a fraction of their branches open, leading to a surge in online traffic that might well stick after the Covid-19 outbreak abates. One big U.K. bank saw demand for its online app more than triple to 5,000 daily downloads last week. In the U.S., Italy, France and Germany bank branches on average provide services to fewer than 3,500 inhabitants. In the Netherlands, where the banks are further along in introducing technological changes, the figure is closer to 11,000. This may well be a turning point in the desirability of local brick and mortar banks.

The acceleration toward digital banking after the coronavirus “will probably be very fast,” UniCredit SpA Chief Executive Officer Jean Pierre Mustier told Bloomberg Television on Monday. Smaller banks in particular will have to adapt quickly. As economies implode under lockdowns affecting more than one-third of the world’s population, banks are in demand like never before. That won’t last.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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