200 Ex-I Bankers

Bad Second Half

Not All I-Banks Same

Sarkar no help

What’s in the Future?

Additional reporting by Rishi Shah

Ankush Sharma (name changed) was sacked in the usual style of his profession. An investment banker in a global bank, he reported to work like every other day, during the course of which he was asked to report to the boardroom for what he thought was a routine meeting. He was handed his severance cheque, and while he was away from his desk, his computer was locked so as to disable any transfer of data. He left in the next half an hour.Sharma is a part of what’s building up to be a wave of layoffs and restructuring in investment banking in India. The trend picked up in the second half of 2011. And this may be the first time such a major culling is happening in I-banking in India.The 2008 subprime crisis didn’t result in too many layoffs in Indian operations of global investment banks and they were largely driven by closures at large US banks. Sonal Agrawal, CEO of executive search firm Accord India, says, “In 2009, the domestic economy was not affected as much. Given slowdown in India, it’s structurally different now and more severe.”How bad is the situation in I-banking now? Industry sources say across all major banks and at all levels, the total number of investment bankers laid off in India would be considerably more than 200. Of the majors, UBS Credit Suisse and Goldman Sachs are implementing restructuring plans. More layoffs are expected soon.“The restructuring has been 90% at the junior and 10% at senior levels. Bonuses this year are also predicted by markets to be 25-30% lower,” says Puneet Pratap Singh, partner, financial services at global executive search firm Heidrick and Struggles.Kotak Mahindra promoter Uday Kotak said in a recent interview to Bloomberg that the money that I-banks are making now no longer justifies the number of employees or their salaries. The industry has 20-40% excess capacity and there is correction underway, Kotak had observed.After poor second-quarter results in 2011, banks like Nomura and Credit Suisse announced plans to restructure costs and cut staff across operations. According to a Nomura spokesperson, “at the time of its second quarter results, Nomura announced its intention to reduce its cost run rate by $1.2 billion, and we are in the process of executing that plan as quickly as possible”.People familiar with Nomura’s internal operations said around 100 people have been laid off in the wholesale banking division in the bank’s backend Powai, Mumbai office. Nomura denied this figure. The bank said job losses amount to only around 2% of its employees in India.In the first half of 2011, many deals in the capital market and the mergers and acquisitions field were concluded. Around 80% of the total Rs 25,000-crore capital market fund mobilisation was raised in the first half. In both business activities, deals in India were far fewer in the second half of 2011.“While there were many inbound and outbound deals in the first half of 2011, the second half of 2011 was tough for M&As because valuations came down and there was significant market volatility,” says Raj Balakrishnan, head of Mergers and Acquisitions, Bank of America Merrill Lynch Fewer deals meant a hit on investment banks’ profit margins. “In the past year, fixed cost to revenue ratio for investment banks have gone from 50-55% to 65-85% and in some cases even 80%. The main reason was that as compensation increased substantially in 2010 compared with 2009, revenues fell 40-45%. Investment banks had no option but restructure operations and reduce head counts,” says Singh.An excellent demonstration of I-banking troubles is clear from this story: Collin Stewart, a midsized British I-bank, had bought a 50% stake in Inga Capital, a Mumbai boutique I-bank, in 2007. The equity was bought for Rs 10 crore. In August this year, Collin Stewart exited Inga, selling its stake for just Rs 1 crore — taking a 90% hit on its acquisition price. Collin Stewart itself was bought this month by a Canadian bank, Canaccord.Still, all I-banks in India haven’t been affected equally. The Indian I-bank space is divided between global giants such as JP Morgan Chase , Nomura and UBS, domestic big players and boutique firms.The India operations of foreign I-banks have taken the biggest hits in recent months. One reason is these banks don’t take deals that don’t promise a commission of at least Rs 15 crore. Since commissions are typically 1-1.5% of a deal, the minimum deal size has to be around Rs 1,000 crore.Few deals of that size have happened in the past six months. Some domestic I-banks, on the other hand, are not doing as badly. “There has been an impact on all players. But after the 2008-09 crises, most Indian I-banks ran tightly managed operations,” says Atul Mehra, MD, investment banking, JM Financial , an Indian financial services firm.I-banking in India came of age after the acquisition of Corus and Novelis in 2007 by the Tatas and Birlas, respectively. “Sometime in 2006 and early 2007, India captured the attention of global bankers. They were looking at setting up shop here either to help global clients acquire companies in India or take India Inc to the overseas markets,” Inga Capital promoter and president, GS Ganesh said.The Lehman crisis didn’t impact jobs in I-banking in India as severely as in the West. Though high finance got back some vigour in the West in 2010, global corporations’ appetite for overseas deals hasn’t come back. This has started having an impact on I-banks in India, especially on Indian operations of global banks that were geared to serve Fortune 500 companies.Government business was a hope. The GoI wanted to raise funds through public issue of PSUs like ONGC, SAIL, Hindustan Copper, etc. I-banks were ready to work on these deals for little money — the goal was to improve profile and leverage that for business later. However, this too didn’t quite work out. Due to poor market conditions, the government has not done any major public issues this year, despite the fact that mandates for four to five large PSUs were given more than six months ago.For now, foreign I-banks in India are looking to maintain a skeleton staff. Will hiring pick up anytime soon? “Hiring generally rises in the January quarter but that seems unlikely in the case of investment banks. There may be some replacement hiring but investment banks will be cautious,” says Agrawal.Obviously, I-banks will have better time when markets recover – but that’s a big ‘when’. “All investment banks have IPOs in the pipeline and once markets bounce back, revenues will start flowing,” says Sampath Kumar, analyst at India Infoline , a Mumbai-based brokerage.More relevant is what Kotak said in his interview to Bloomberg: “Supernormal returns, supernormal compensations – some of it is gone for a long time and is probably not coming back.”