From the monthly archives:

June 2013

Following the financial crisis in 2008, financial institutions began to take a long look at their corporate cultures and in particular the elements that led to excessive risk taking. What many firms found is their hiring practices focused on technically competent people, generally with above average risk tolerance and a certain competitive edge. While this competitive spirit certain is a critical element in the success of the financial industry, firms are now seeing this spirit must be tempered with an understanding of social responsibility and client empathy. As a result, institutions are looking to strengthen these softer skill areas. This increasing demand is being met by schools across the United States where social responsibility is being taught as a key element of a business program.

Firms Need to Shift Focus in Order to Attract Talent

In the past, the promise of a large bonus check and the prestige of an investment banking career was enough to encourage the best and brightest into the industry. Now, however, the status of the profession has taken a huge hit, and the industry is no longer seen as the elite landing place it once was. Careers in securitization or trading for example now have negative connotations that hiring managers need to overcome when making a pitch to young, idealistic students. As a result, investment banks are being force to adapt positions, requirements and cultures in order to still attract and retain today’s top grads.

Candidates Now Viewing Finance as a Wider Market

Increasingly, candidates are considering the wider financial industry when leaving either an undergrad or graduate business program. In the past, new grads would be focused on their dream industry, whereas today they view opportunities much more broadly. This also creates more competition from the perspective of investment banks when seeking top young talent. The negative connotations discussed previously also work against investment banking when compared to the wider financial industry

“There has been a change in MBA recruitment since 2008 and especially in the past couple of years,” Faye Woodhead, the Head of Graduate Governance, Planning and Strategy at Deutsche Bank told the Financial Times. “Historically, people would focus on one industry in their career search. Now the range of options is much wider and there is a move to hedge funds, private equity, technology firms and corporates as well as investment banking.”

Ms. Woodhead also suggested that a significant culture change is underway within the industry. Solutions are more client-centric and even traders are expected to get in front of clients and build critical relationships.

Culture Change Critical for Success of Investment Banking

As the industry begins to recover, many hiring managers are starting to see the impacts of the industry’s reputation on new grads. Over the past few years, the lack of new hiring has masked investment banking’s shortcomings in comparison to peer financial segments. Now, as competition heats up, investment banks must make the case to young people that the industry offers an ethical and rewarding place to earn an above average income. This will be a tough proposition to sell to individuals that entered school right at the peak of negative media attention for the industry. However, progressive changes from leading institutions are making headway, and offer the promise of a more attractive corporate culture for new, ethically-focused, grads.

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The strong investment banking revenue results posted in May are causing a great deal of optimism within the industry for a strong second half of 2013. The Wall Street Journal is reporting that revenues for the year are likely to be 10 to 15 percent higher than 2012 numbers based on the trend demonstrated so far. These results are representative of an industry heading back towards strength, and we’re seeing the results in the employment space as well, as indicated by our article last week that suggested that demand for some positions are starting to outpace supply.

Many Investment Banking Sectors Outperforming

While we have seen strong results from bond desks and some advisory activity over the past few years, renewed strength across the board is certainly behind some of the optimism. Equity capital markets revenues began to heat up in the second half of 2012, however that was offset by some fall in bond origination and trading revenues, albeit from recent highs. Now, however, we’re seeing most segments performing well, including both equity and bond capital markets. While the demand for talent in the industry had been based upon certain specialized skills over the past few years, current demand likely is more broadly based.

The one segment that is still struggling to return to past highs is the M&A advisory area. Deutsche Bank’s Matt Spick indicated in a recent note that, “We are now two-thirds of the way through Q2, and investment banking trends are looking robust for the second quarter across most asset classes, with M&A announced the main area of weakness (still).” Many companies may be delaying acquisition activity due to high current price to earnings multiples and uncertainty about the near term economy.

Fixed Income Still Leading the Way in May

Despite the strength of equity capital markets in recent months, fixed income desks are still providing some of the most lucrative returns for many investment banks. There was strong debt issuance in May in particular, including more cyclical segments such as high-yield and leveraged loans. Equity secondary offerings were also a strong source of revenue, while again M&A, as well as initial public offerings, lagged behind the leaders.

What Are the Implications for Investment Banking Job Seekers?

We’re now seeing a sustained level of revenue growth across many firms and many countries. This does suggest some reason for optimism for employment prospects in the coming months. Projected industry revenue growth does offer investment banking units to make the case for expanding their teams to their wider financial institutions or to their investors, as the case may be. This contrasts sharply with the past several years where declining revenues across the industry made it difficult for senior managers to pitch further investment in what seemed to be a dying financial industry segment.

That said, the industry does face growing pressure, uncertainty, and cost from ongoing regulatory reform. Unsure of what new regulation may cost, some firms have seemed unwilling to grow their committed resources, despite the potential for overall industry growth. Until we see some increased certainty and predictability from financial regulators worldwide, employment growth in the investment banking industry will be constrained.

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After what seems like several years of lackluster hiring in the investment banking industry, leading head hunters, particularly in London, are starting to see some positive trends develop in the hiring intentions for more junior positions. According to the Wall Street Journal, several leading investment banks are desperately seeking additional employees at the associate level, and are actually having a difficult time fulfilling demand with existing supply. This certainly will be a welcome development for more junior members of the industry looking for new opportunities.

Associate Positions Sought After by Less Experienced Professionals

The associate position is one of the more junior ranks in the investment banking world, wedged in between the entry level analyst role and the higher ranking vice president position. Individuals in such roles would have more responsibility and prestigious work than an analyst, including some client facing work, but much of the day is still comprised of the grunt work of investment banking. Salaries for these positions in London would range from £105,000 to £170,000 depending on experience. Again, this level of salary is ahead of what an analyst would expect, but the incentive compensation in particular would be much less than what is seen in more senior roles.

Lack of Hires During Crisis Led to Today’s Shortage

In the years following the financial crisis, most investment banks greatly scaled back their hiring programs for new graduates, if they didn’t shut down hiring altogether. Unfortunately for these firms, this decision has created a gap in their staffing as associates moved up to higher ranked positions or moved to another firm or out of the industry altogether.

In the view of the headhunters interviewed in the Wall Street Journal article, it is increasingly difficult to hire associates away from other firms, even with the promise of substantial pay increases. Most associates are simply uninterested in lateral moves within the industry, preferring life on the buy side or in corporate environments instead. Commenting on trend, one merger and acquisitions head at a leading international bank told the Journal that staff now considered their positions as a job, rather than a career, leading to more openness to consider opportunities outside of investment banking.

Many Graduates Sought Opportunities in Private Equity, Hedge Funds

The finance graduates of the last several years were not simply sitting idle waiting for the return to strength that the investment banking industry may be just starting to see now. Instead they sought opportunities in private equity firms and hedge funds – and many have decided to stay. While these individuals are a potential source of new associates for the investment banking industry, it may be hard to sway these employees to an industry with more work demands, even with higher compensation.

How the investment banking industry handles this shortage in coming years will be an interesting storyline. While the industry will certainly look at other potential sources in filling these associate vacancies, some firms may be forced to reconsider how their organization is structured in order to remain productive despite empty chairs. In any event, to those in the industry it certainly is interesting to see how the hiring decisions of several years ago are coming to impact investment banks today.

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Despite Job Cuts, Investment Banking Salaries Rising

June 3, 2013

It is no secret to those in the industry: investment banking headcounts are on the decline. Most institutions around the world are scaling back their staff in the face of higher regulatory and compliance costs and improved technology that allows firms to do more with fewer high cost people. That said, those that remain in […]

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