Bad news have been plaguing the world’s more powerful banks ever since the World Health Organization declared the SARS-CoV-2 pandemic in March 2020. Wall Street investors appeared to have reacted as they should have when the first Black Monday crash took place; months later, however, investors were largely marching out of step with the harsh realities of pandemic economics.
A bucket of ice-cold water was thrown on Wall Street in the middle of August when legendary investor Warren Buffet announced that he cashed out a significant portion of his banking stocks in order to make room for what he thinks is a sure bet in the current market climate: Barrick Gold, a major gold mining conglomerate. Buffett is not only one of the wealthiest individuals in the world; he is a seasoned investor who only believes in market fundamentals such as “flight to safety” strategies, and he is certainly following the herd instinct this time around.
All around the world, major banks such as HSBC, Credit Suisse, and ABN Amro have announced major staffing cuts in their corporate banking and investment operations. This is a trend that started in late May and has continued through August. Bouncing back from the economic downturn of the pandemic is going to be difficult for many corporate banking giants, particularly those that were already struggling to generate new business. As we can see in this Yahoo finance article from January, Citigroup executives in the capital markets department were already dealing with geopolitical uncertainty in regions such as the Middle East, Hong Kong, and Venezuela; moreover, they are watching in dismay as trade relations between the U.S. and China become more strained every day.
The problems that corporate banking departments at Citigroup and other major players have been facing throughout the Trump administration are now exacerbated by the coronavirus pandemic. If corporate clients were skittish about taking on major projects before, it is easy to imagine that they have become even more risk averse now.
In August 2020, we are also seeing banks such as Wells Fargo cutting back on investment and retail services staffing while at the same time loading up on seasoned risk analysts and compliance officers. In the past, market analysts who cover the banking sector would have guessed that such hiring activity was conducive to a future spike in corporate banking services, but this is not currently the case. We will likely see a more conservative approach to financial operations from now until the second quarter of 2021, and we can anticipate that there will be a strong focus on operational compliance as well as mitigating risk.
If it sounds like the outlook for the rest of 2020 is very gloomy for corporate banking, such is the reality, but this does not mean that optimists will not be looking for transactions ripped from the pages of the silver linings playbook. While we can forget about initial public offerings for the time being, there will be investor groups looking to acquire distressed business assets or maybe even revive failing brands if they look like they still have some profits left in them, but we should not anticipate growth until a few months down the line.