Reduced profitability for Goldman Sachs and Morgan Stanley set to bite into bankers’ payouts

MARKET turmoil is expected to have taken its toll on US investment banks in the past quarter, slashing revenues and bonus pots as the major Wall Street brokers suffer from shrinking trading volumes.

Analysts expect Goldman Sachs and Morgan Stanley to be hit particularly hard, with Goldman’s own proprietary investments seen as likely to record sharp declines.

Analysts at Bank of America/Merrill Lynch expect a drop of $2.29bn (£1.47bn) in quarterly revenues at the bank’s investments and loans division, which relates to bets made with its own capital.

If the forecasts are correct, Goldman and many of its rivals will be forced to cut drastically into bankers’ pay pots to keep overall pay-to-earnings ratio in line.

US research house Bernstein has suggested that “a three per cent reduction in the compensation ratio of its trading business will allow Goldman Sachs to beat its cost of capital in [some] units under Basel III capital rules”.

But a cut in pay costs is likely to mean further lay-offs on trading floors since many banks have ramped up higher fixed costs in pay due to overhiring and greater regulation of bonuses.

Even those who were originally bullish on Wall Street have become gloomier in this year’s third-quarter previews due to stagnation in the US economy.

Most major revenue earners for banks are expected to have been hit hard by the slowdown in trading activity. Analysts at Keefe, Bruyette & Woods expect Goldman’s combined revenues from debt and equity capital markets (DCM and ECM) to decline by some 70 per cent to $255m “as volatility and uncertainty in the market effectively brought both DCM and ECM to a halt during the quarter”.

Bernstein’s Brad Hintz has also revised down his estimates for nearly every division in the major banks. “Fixed income trading units faced a difficult third quarter... Equity capital markets desks were quiet... and announced M&A activity slowed,” Hintz wrote in a note.