December 6, 2023

Investment Banking

Let Your Investment Banking Do The Walking

BMO lays off staff in capital markets division as deal flow stagnates

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Looking east on Adelaide St. W., towards Bay St., the sign for the BMO on March 8. The layoffs signal the beginning of what is expected to be a sector-wide culling.Fred Lum/the Globe and Mail

Bank of Montreal BMO-T is cutting jobs in its capital markets division amid a year of slower trading and investment banking activity that dragged on earnings results.

The layoffs amount to about 4 per cent of BMO’s capital markets positions globally – or more than 100 employees – with about half of those roles in Canada, according to sources familiar with the matter. The trims are a small portion of the more than 2,800 people in the bank’s capital markets unit, but signal the beginning of what is expected to be a sector-wide culling.

The Globe and Mail is not identifying the sources because they are not permitted to discuss the matter publicly.

After a torrid deals market in 2021 boosted earnings, activity has slumped across Canada’s largest lenders. Market volatility and economic uncertainty has dampened equity and debt issuance and dragged on investment banking revenue. Profits have sunk across the big banks, with BMO capital market’s net income falling 15 per cent as expenses jumped 14 per cent in the second quarter from the same period a year earlier.

“We are focused on managing expenses dynamically, growing revenue and improving our relative efficiency ratio; which includes aligning our resources to achieve these priorities,” BMO spokesperson Kelly Hechler said in an e-mail statement on Wednesday. “We are working closely with affected employees to provide support and to ensure they are treated with fairness and respect.”

Lenders face a tougher operating environment as concerns of a recession weigh on loan demand and high inflation hikes costs. Expenses have jumped across the sector, putting pressure on top brass to trim spending. Salaries have been a major factor in higher costs after banks previously competed on wages and bonuses to scoop up and retain talent.

Compensation is one of the fastest growing expense segments and is a “disproportionate driver” of costs, climbing 17 per cent year over year across the sector and representing about 50 per cent of total fixed costs, according to research by National Bank of Canada analyst Gabriel Dechaine.

“We don’t recall sector expense growth ever hitting these levels, which shouldn’t be terribly surprising given we are in unique times, highlighted by 40-year high inflation rates,” Mr. Dechaine said in a note to clients in early June.

During Royal Bank of Canada’s second-quarter earnings call in May, chief executive officer Dave McKay said that the lender reacted “strongly” to compete during staffing shortages last year when technology companies ramped up hiring. As a result, RBC “overshot by thousands of people” and compensation costs spiked 20 per cent in the second quarter, lifting overall expenses higher by 15 per cent.

“Cuts to capital markets groups amongst the Canadian banking dealers have been a long time coming,” Adam Dean, founder of financial services recruitment firm Dean Executive Search, said in an interview, adding that deteriorating equity and debt market conditions have eaten into a huge swath of overall revenue for the divisions. “These things tend to come in waves, and the real question is going to be which bank is next.”

Canada’s Big Six banks had also bolstered their investment banking teams to keep up with the surge in demand for initial public offerings and merger and acquisition activity in 2021. Since the first quarter of that year, BMO added about 400 employees to its capital markets team.

Major U.S. banks have been cutting swaths of investment banking positions throughout the year. Investment bank Goldman Sachs Group Inc. eliminated about 3,200 roles in January. In recent weeks, JPMorgan Chase & Co. reduced headcount by about 60 positions across its investment banking arms in North America and Asia.

BMO is also integrating its $17.1-billion takeover of California-based Bank of the West – a task that will further boost expenses as BMO looks to streamline costs between the two lenders. The bank expects to save on technology expenses since it uses many of the same platforms as Bank of the West. BMO also plans on saving about $500-million in revenue “synergies,” which includes efforts such as streamlining similar products and services.

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