Morning Coffee: These clients will save your investment banking job. Nomura cuts in the U.S. again
If you work in sales or trading now, it's all about serving big clients. Deutsche Bank said in its big strategy update last year that 30% of its clients generate 80% of its profits and it will pare back the smaller ones - this could mean significantly fewer staff. Morgan Stanley's fixed income hiring has focused on its 'senior relationship management team' - which schmoozes significant clients.
Quite how beholden investment banks are to a select band of behemoths who generate the lion's share of their revenues has come to light through some leaked documents on Bloomberg.
For example, Citigroup’s equity-research team in downtown Manhattan has a secret list, known as the “Focus Five,” of heavy-hitting hedge funds that get the best trade ideas, customized trading models, easier access to research and the most contact with analysts and other executives. The favoured elite on the list are Israel Englander’s Millennium, Steven Cohen’s Point72, Clint Carlson’s Carlson Capital, Ken Griffin’s Citadel and one of its subsidiaries, Surveyor.
However, Citi is far from alone in this policy of preferential treatment for the largest sources of profits. An HSBC spokesperson said that it is “reducing the number of dormant and low-revenue clients,” tacitly acknowledging that a comparable practice is in place.
Morgan Stanley categorizes its fixed income customers into a three-tiered hierarchy consisting of “supercore,” “core” and “base.” Approximately 2,000 firms that weren’t deemed worthy of one of those tags get only limited access to the bank’s management, sales and research departments, Bloomberg reported.
In fact, as banks’ profitability has shriveled under the weight of increased regulations, historically low interest rates and unfavorable market conditions, among other factors, it has become common practice on Wall Street to focus on the small percentage of clients that trade the most and thus pay the banks handsomely.
The result is that a majority of clients, which includes small-to-medium-sized mutual funds and hedge funds, are denied access to banks’ research and other services they used to rely on.
Separately, Nomura plans to cut anywhere from 20% to 30% of its North American workforce. It currently employs approximately 2,500 people in the U.S. and Canada, meaning between 500 and 750 Nomura employees are likely to lose their jobs.
This is yet another change of strategy at the Japanese banks' U.S. business. This time last year, Nomura was hiring and added over 50 people, and as late as December its CEO revealed plans to hire at least 20 more M&A investment bankers this year.
So what changed? Less revenue from trading and dealmaking leading to a sixth-consecutive quarter of pretax losses for Nomura.
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