Standard Chartered’s decision to close its equity derivatives and convertible bond units is expected to have a demoralising effect on investment banking employees in other divisions and may prompt additional departures, industry observers and recruiters predict.
The UK-headquartered bank revealed plans to shutter the units in a statement on Monday. It said the decision was made after conducting a review of the divisions which considered product innovation and execution, as well as a more efficient use of capital.
StanChart’s new chief executive Bill Winters has expressed the need to trim or eliminate capital intensive and low profitability departments in an effort to raise the bank’s overall financial performance. Winters joined the British bank in May this year, replacing Peter Sands, the bank's beleaguered chief executive who left in June.
Insiders said both the equity derivatives and convertible (CB) division had a low return on equity, which led to the decision to axe them.
StanChart said the closures would be done in stages and will see the loss of 10 Hong Kong-based jobs, according to a spokesman. It could take more than three months for StanChart to properly settle outstanding derivatives positions, he added.
The decision to abandon equity derivatives and CB units comes nearly 10 months after StanChart closed its equities business, including equities trading, research and equity capital markets (ECM) desks, just weeks after adding headcount to fill senior equities positions. It cut 200 jobs at that time, mostly in Hong Kong, Singapore, Korea, India and Indonesia.
The latest round of closures underlines the bank's extended efforts to build out its investment banking capabilities following the global financial crisis in 2008, which included the $73 million acquisition of equity broker Cazenove Asia.
Some recruiters argue StanChart is making difficult but sensible moves amid a time of stiff competition and reducing margins in equities.
“Standard Chartered has real strengths in wealth management, corporate and retail banking,” said Nick Green, a managing director at Carraway Group. “These flow businesses seem well placed to succeed in the current economic climate. However the timing of its investment banking build-out seemed to coincide with a point where the industry was already over-broked, so it would appear natural that Winters has made the difficult but necessary decision to re-focus the business.”
Other headhunters say the cuts are having a demoralising affect on many remaining investment banking personnel, some of whom are weighing options.
“StanChart seems to be going back to where it was 10 years ago,” said a veteran Hong Kong-based financial recruiter. "I doubt any proper investment banker will want to hang around."
He speculated the bank may struggle to retain its M&A bankers and noted that it continues to have a large real estate banking team despite the absence of an ECM desk. Some elements of the bank’s corporate finance division are also seen as vulnerable, particularly former equity bankers who moved into fixed income.
The spokesman declined to comment on why it has taken so long for StanChart to shutter the remnants of its equity operations following the elimination of most of the division in February.
Upon his appointment in June Winters said he would review the performance of all areas of the bank. He is expected to reveal results of the reviews to the bank’s shareholders in early December, along with a detailed plan to lift performance.
Winters is focused on getting rid of underperforming operations across its operations. In January the bank slashed 2,000 jobs in retail banking, on top of the 2,000 positions that were already scheduled for elimination.
Despite the most recent cuts, the bank said it remained committed to Hong Kong, a financial services hub a stone's throw to mainland China.
“Our securities trading services, which are an integral part of our wealth management solutions for retail and private banking clients, will not be affected by this decision,” the statement said.
StanChart reported a half-yearly operating income of $8.49 billion in August 2015, down 8% from a year earlier, while its profit before tax dropped 44% to $1.824 billion. It blamed the fall on “adverse loan impairment trends [which] continued to impact performance”.
The bank is reportedly eyeing capital-raising efforts to bolster its balance sheet. StanChart’s Common Equity Tier 1 stood at 11.5% as of August, and it has said it wants to improve this by 80 basis points.