Job cuts have become a common phenomenon for companies (across all sectors) to sustain the profitability when a particular division doesn’t earn sufficiently. For banks, which already face top-line pressure, trimming jobs seems a prudent way to control expenses and improve returns.
The latest financial institution to jump on the bandwagon is Morgan Stanley MS. The company is planning to slash nearly 25% workforce at its fixed income division. The news was first reported by Bloomberg.
The job cuts at Morgan Stanley will take place across all regions, reportedly within the next couple of weeks.
The first question that comes to our mind is why the decision to slash jobs at fixed income division? We all know that this division was not performing well for quite some time. So what changed this time around that led the company to take such a step?
As 2015 begun on an optimistic note for Morgan Stanley, the company executives projected a rise in market share for fixed income division over time, given the exit of several European peers including UBS Group AG UBS, Deutsche Bank AG DB and Barclays PLC BCS, as well as the company’s credit rating upgrade. However, slowdown in China along with several other global concerns led to low level of client activity mainly in fixed-income, currencies and commodities trading (“FICC”).
Notably, Morgan Stanley reported a 42% drop in bond trading during the third quarter of 2015 (worst performance since the 2008 financial crisis). Though fixed income results were strong in the first half of 2015, the third-quarter slump more than offset this positive.
Further, during an investor conference on Nov 17, Colm Kelleher, head of the investment banking and trading division, stated that third quarter “was clearly very weak, and I don’t think Q4 is going to be much better.”
Additionally, as per industry analytics firm Coalition Ltd., FICC revenues will likely drop to $65 billion in 2015 at the top 10 global investment banks. At the same time, we believe that stringent capital rules and a shift in investor preference toward electronic trading have cut margins in fixed income trading operations.
Though Morgan Stanley has slashed the capital allocated to fixed income operations, fall in revenues is making the division less profitable. Hence, controlling expenses (by reducing bonus payment or cutting staff) is expected to boost profitability.
Following this news release by Bloomberg, shares of Morgan Stanley rose 1.6% at close of the day. We believe the move cheered investors as job cuts are likely to improve overall profitability of the company.
Currently, Morgan Stanley holds a Zacks Rank #5 (Strong Sell).
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