Key takeaways
- Morgan Stanley has announced 3,000 job roles will be cut in second round of layoffs
- Bank of America, Citigroup and others have also made similar announcements in recent weeks
- The banking sector has now survived three US bank failures after First Republic became the latest to collapse
The banking sector is really going through it right now. As the industry still gets used to the new landscape without regional bank First Republic in it, Morgan Stanley has become the latest to confirm more mass layoffs.
The bank joins peers like Bank of America, Citigroup and Goldman Sachs, all of which have announced layoffs thanks to a dismal forecast for corporate deals and IPOs this year. As the economy lags and talk of a recession grows, deal volume has been way down, which is hurting some banks despite stellar earnings.
Unfortunately, that has a real impact on the banks’ headcounts. While the Fed weighs up another quarter-point hike in interest rates, the banking industry struggles on. We’ve got the latest on the banking sector layoffs and what it means for investors.
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What’s happening at Morgan Stanley
Top advisory and wealth management firm Morgan Stanley has confirmed it’s laying off an estimated 3,000 roles by the end of June, totalling roughly 5% of its workforce. It had already made redundancies back in December when it cut 2% of employees.
The move comes after a good earnings season for most major banks, including Morgan Stanley. It reported $1.31 earnings per share, way up from the forecast $1.19 figure. It also saw its wealth management arm’s revenue jump 6% as its interest income increased. The bank’s shares rose 6% at the time.
But the real cause for the move was also apparent in the report: Morgan Stanley’s investment banking revenue was down 24% in Q1. For this reason, the layoffs are anticipated to affect banking and trading roles the most.
Are other banks making layoffs?
In April, Bank of America announced it was culling 4,000 jobs by the end of Q2, totalling around 2% of its workforce. CEO Brian Moynihan said the layoffs were down to a cooling jobs market. The dismal news came just before a stellar earnings report for the bank, which saw a 15% profit rise from the same time last year to $8.2 billion, though its equity market trading revenue slid by 20%.
Goldman Sachs is mostly focused on corporate banking, so it’s no surprise that it saw a 26% plunge in investment banking revenue for Q1. As a result, it confirmed it would be cutting 3,200 jobs or 6% of its global headcount and restructuring its consumer banking efforts. “We tried to do too much too quickly,” Goldman Sachs CEO David Solomon said.
Citigroup also said back in March that it would be laying off around 1% of its headcount; the final figure wasn’t confirmed but was thought to affect hundreds of roles at the bank. Boutique wealth manager Lazard also confirmed it would reduce its employee headcount by 10% this year, citing a difficult capital markets landscape and inflated wages.
So even though some banks have enjoyed profits this quarter, it looks like they’re looking ahead to the future, where the Fed has now predicted the US economy will see a mild recession by the end of the year.
Other turmoil in the banking industry
Another factor that hasn’t helped has been the war against inflation the Fed has been fighting, which caused it to raise interest rates to their highest levels in 40 years. It was too much for Silicon Valley Bank and Signature Bank, who both folded in March. While First Republic secured a $30 billion bailout from larger banks, it collapsed at the beginning of this week.
The news sparked a panic with Wall Street, with most banks seeing a drop in share prices. Regional banks suffered even more: PacWest saw a 27% drop in its share price, while Western Alliance slid by 20%.
The Fed is currently weighing its next steps, but a quarter-point hike is largely predicted today thanks to mixed economic data. But as a high-interest rate environment proliferates, this further scuppers IPOs and M&A activity for the banks and puts further pressure on institutions struggling to operate.
What it all means for investors
Morgan Stanley’s share price is down 2.32% over the last five days, not helped by the turmoil from the First Republic fallout.
For investors, this is all pretty worrying. But it’s worth noting that the bigger banks were able to absorb and even thrive amid the March banking crisis, which is a direct result of more stringent regulations being in place since the 2008 financial crisis.
The layoffs are also largely down to one cause: M&A activity drying up. This is a pause rather than a shutdown, as companies considering IPOs and deals will simply put those plans on ice until the economic environment is more favorable.
In our view, more banks could fail but the bigger institutions are up to the task of absorbing the shock. This makes bank stocks a longer-term play rather than to the moon for at least this year. Overall, there’s no reason to change your strategy unless you want to diversify more.
The bottom line
The banks have had it rough since the start of the year, and these layoffs just go to show the market isn’t picking up any time soon. But things are different from 2008, even if we are seeing bank failures, and consumer banking is still doing well despite the uncertainty.
A jittery Wall Street will be watching the banks like a hawk to spot any more signs of dysfunction, but as it stands the layoffs are a cost-efficiency decision rather than a serious sign of trouble on the horizon.
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