20th May 2024

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Business Industry and Financial

Morgan Stanley Considers More Layoffs As Banking Worry Continues

Key takeaways

  • Morgan Stanley is rumored to be cutting 40 roles in its Asia-Pacific investment banking arm, having already slashed jobs in the department last year
  • Morgan Stanley’s stock price were flat on the news
  • Investment banking giants continue to struggle, but the worsening relationship between the US and China is also to blame

Investment banking behemoth Morgan Stanley is said to be weighing up job cuts in its Asia-Pacific investment banking department as part of its mass layoffs round announced earlier this month. 40 roles are thought to be affected, but the final figure could be higher.

Morgan Stanley has struggled this year as M&A has plummeted amid macroeconomic headwinds, but the largest economy in the world falling out with the second-largest economy in the world isn’t helping things. Here’s the latest on the rumored job losses and what the wider banking picture looks like at the moment.

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What’s the latest on Morgan Stanley layoffs?

New reports suggest that Morgan Stanley plans to cut around 40 roles in its Asia-Pacific investment banking team. It’s anticipated to hit the China team the most, having already cut down 50 roles in the region last year.

At the start of May, Morgan Stanley said it was cutting 3,000 roles globally, amounting to roughly 4% of the bank’s total headcount. Morgan Stanley had an 82,000-strong workforce before the announcement. It had already made layoffs at the end of last year, totaling 2% of its headcount.

It came after the bank was an outlier in an otherwise successful Q1 earnings season for the rest of the sector. Morgan Stanley’s profit plunged 19% to $3 billion and its investment banking revenue dropped by nearly a quarter (24%).

At the time, Morgan Stanley CEO and chairman James Gorman said “investment banking activity continued to be constrained” but that the bank remains “well-positioned to provide long-term value to our shareholders”.

The Asia-Pacific dealmaking scene

For Morgan Stanley, the Asia-Pacific region had contributed 13% of the bank’s net revenue over the last five years, hitting $6.7 billion in 2022. However, global dealmaking has ground to a halt in the face of unfavorable economic conditions and escalating tensions between China and the West.

Corporate M&A activity slowed to its lowest level in a decade in Q1 of this year, with high inflation and dramatically higher interest rates in a short period of time putting most deals on ice. In the APAC region, deals totalled $176 billion in the same period, a 34% drop from the previous year, according to data firm Refinitiv.

As for Chinese investors taking over foreign companies, deal activity has plunged to its lowest level in a decade. Chinese investors agreed to $18.3 billion worth of deals in 2022, a steep drop from 2021’s $38.9 billion figure. 380 cross-border M&A transactions were made by Chinese investors in 2022, the lowest number since 2012.

President Biden is said to be weighing up an executive order limiting American investment in Chinese businesses, not to mention the TikTok US Congress hearing where CEO Shou Zi Chew was grilled on China’s intentions for US data and a full TikTok ban in the US was floated.

None of this bodes well for the future of the US financial sector in the APAC region, at least in the short term.

What was the market reaction?

It’s not all bad news from Morgan Stanley, which also announced this week it planned to increase its headcount in France by 200, bringing the total amount of staff in the country to 500. Many banks have taken similar measures in light of Brexit, making the European market more attractive.

As a result the share price has remained pretty level, but Morgan Stanley stock has declined almost 5% in the last month and 3.23% since the start of 2023. The US government’s debt-ceiling debate is affecting the stock market at the same time.

Are other banks struggling?

A comparable situation is happening at Goldman Sachs, another investment banking titan making structural changes and mass layoffs. Goldman Sachs issued its revenue target and reported a 26% drop in investment banking fees for Q1. Before that, it had announced a round of layoffs, cutting 3,200 roles.

In March, Citigroup said it was slashing 1% of its headcount. The estimated figure is unknown, but it was thought to number hundreds of workers at the bank.

While the sharp end of the banking crisis appears to be over for now – JPMorgan CEO, Jamie Dimon, said as much when the bank took over struggling regional bank First Republic a couple of weeks ago – further bank failures are still making Wall Street nervous.

The Fed has now raised interest rates to a target range of 5% to 5.25%, with many traders hoping for a pause in rates at the next meeting in June. The rapid rise in interest rates preempted Silicon Valley Bank’s collapse in March, causing two other US banks to fail and leaving traders wondering if anyone else is next – namely regional banks, which have struggled ever since.

As banking execs and regulators face questions from the House Financial Services Committee this week about the collapse, PacWest was down 2%, but Western Alliance and Zions Bancorp both edged higher.

The bottom line

If they do go ahead, Morgan Stanley’s job cuts in its Asia-Pacific operations are two-fold. There’s the obvious answer that M&A deals aren’t recovering any time soon, unless we see inflation magically fix itself and interest rates slashed by the Fed.

But a broader geopolitical landscape and US-China tensions could reshape the financial landscape in the short and medium term, despite the bountiful opportunities China’s economy promises. Until the countries can get along, we wouldn’t expect growth in this area any time soon.

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