Tough Second Quarter Causes Doubts in Investment Banking

According to a Dow Jones Financial News report released recently, after a strong first quarter in 2012, the second quarter has not lived up to expectations for investment banks around the world. Revenues worldwide at investment banks are down ten percent year over year when looking at the first half of 2012, while net margins are even worse, falling fifteen percent.

The report suggests that investment banks will be required to further cut staff and costs as these margins continue to plummet, in addition to the 30,000 bankers that have lost their jobs over the past twelve months. Some pundits even question whether investment banks will continue to exist in their current form moving forward.

Concerns for Future Cuts

With top line revenues falling so substantially in the first half of the year, the reality is sinking in with investment banks that the deal volume simply doesn’t exist anymore, and that is making it difficult to justify maintaining current staffing levels. Banks are already struggling to control costs with the current level of layoffs, and senior executives of integrated banks are going to begin to demand instant results if their investment banking arms are not contributing to their overall margins.

What Will the Next 5 Years Bring?

The Dow Jones report suggests that some institutions will begin to look beyond cuts and may start examining whether or not to exit the investment banking business altogether. With such a high risk segment acting as a drag on earnings, the risk adjusted returns of many diversified financial institutions are being negatively impacted by their investment banking arms. Directors, executives and ultimately shareholders are unlikely to tolerate that reality forever, and additional regulatory and political pressures may end up forcing the hand of many organizations.

What this Means for Investment Banking Job Seekers

The outlook in investment banking is still quite negative for most looking to enter the industry. Layoffs in many investment banks are still widespread, and there certainly are not many firms looking at add internal resources at this time. However, some optimism may be drawn by the reality that a consolidated industry, with fewer participants, maybe stronger in the future. However, the shakeout of existing experienced investment bankers needs to occur before any significant number of new opportunities will open up.

The one exception to this case is for individuals with highly specialized knowledge of certain industries that are still experiencing significant transaction volume. Boutique firms are still experiences some success in industries such as energy and in some technology areas. These firms will continue to look for talent and knowledge to add to their current in house resources. Outside of these specialized firms, however, investment banking is certainly not appearing to be a top choice for those looking for employment opportunities.

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