If you want some idea as to why Credit Suisse was cutting 5,300 jobs on Thursday, a note published by Bernstein Research might help.
Analyst Dirk Hoffmann-Becking reckons it will be 2012 before revenues from equity sales, trading and underwriting are back at their 2006, pre-crunch levels.
Based on updated analysis, we expect underlying Equity Sales and Trading and Underwriting revenues to fall by 41% in 2009 versus 2006 levels [we use 2006 as the most recent "stable" year, pre-credit crunch]. Year to date revenues have fallen 17% and Q3 annualized revenues are 42% below 2006
However, we expect revenues to recover from the expected trough in 2009 back to 2006 levels in 2012. Overall, we now expect Deutsche Bank 2009 equity-related revenues to fall 41% from 2006 levels, Credit Suisse revenues 42%, and UBS revenues 50%. We have reduced our earnings estimates accordingly.
The good news is that Hoffman-Becking does not see a re-run of the 32-year slump in equity trading volumes which followed The Great Depression. This is because:
The structure of equity ownership in the US has fundamentally changed since 1945. In 1945, 92% of corporate equities were directly held by a small number of households, who derived the lion’s share of their income from dividends and capital gains. Individuals tend to stay away from equity markets for a long time after they have experienced a severe loss, as we have seen when the dot-com bubble burst.
Today only 26% of corporate equities are directly owned by households, with the remainder being managed professionally. Professional money managers operate a large investment infrastructure and hence tend to put this back into use as soon as opportunities arise.
Nearly all of the last five year’s growth in velocity was due to technological advances and the growth in hedge funds/proprietary desks. We do not think that we will wind back the clock on trading technology and the continued success of alternative trading platforms indicate that this is unlikely to happen.
However, the next three years are going to be tough.