'The biggest layoffs are ahead of us'.
Bloomberg News reports that Wall Street firms must cut more jobs to boost their return on equity and satisfy shareholders, said Meredith Whitney, a banking analyst and founder of Meredith Whitney Advisory Group LLC.
'The biggest layoffs are ahead of us', Whitney said in a Bloomberg Television interview last week with Tom Keene, Sara Eisen and Scarlet Fu. 'It’s no fun, it’s painful but you have to downsize dramatically, get more efficient on every single line of business'.
Even as second-quarter net income helped increase the biggest U.S. banks’ return on equity, a measure of profitability watched by shareholders, most remained historically low. ROE frequently exceeded 20% at banks including Goldman Sachs and Morgan Stanley before 2008.
Wells Fargo’s normalized return on equity rose to 14% in the second quarter, the highest since the three-month period ended September 2008, according to data compiled by Bloomberg, and JPMorgan reported 13%. Citigroup’s rose to 7.2%, the highest since the third quarter of 2007, while Morgan Stanley was at 4.4% and Goldman posted a ROE of 10.5%.
'So many of the banks are struggling with very low ROEs and the shareholders are not going to stand for it', Whitney said. 'This is not the type of returns on capital that investors are going to pay for'.
Whitney said she doesn’t see opportunities for firms to improve ROE through increased revenue alone, making cost-cutting inevitable.
'There’s only one way because structurally the revenues can’t move the needle', Whitney said. 'It has to come from expenses'.
Evercore Partners’ Ralph Schlosstein, speaking in the same interview, agreed that downsizing and improving efficiency are necessary to improve the biggest banks’ low rates of return.
'Substituting technology for people, that’s going to happen across the board', said Schlosstein, 62, the New York-based advisory firm’s chief executive officer.
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