The damage done from job losses over the past few years has been quite severe. I think the biggest problem going forward is the realization that the economy, during the past decade, was artificially inflated due to easy monetary policy; therefore, many of the industries were operating far above fundamentally sound levels.
One of these sectors that were running far above optimal levels was the financial services and bank stocks sector. During the last decade, bank stocks drove massive growth in corporate earnings that were based on an economy and financial system that were not structurally sound. Following the bursting of the bubble, approximately 300,000 financial services jobs have been eliminated. The end of the job cuts is not yet here for bank stocks.
In the drive to continue generating some corporate earnings, bank stocks are now coming to terms that their future business levels will be far lower than the past decade. This means job cuts will have to continue. In a sign that management finally understands the structural headwinds, Citigroup, Inc. (NYSE/C) just announced 11,000 layoffs in a variety of business sectors. I think that there will be further layoffs among the bank stocks, as revenue growth simply won’t reach the same growth path as previously estimated, which will endanger corporate earnings gains. (Source: “Wall Street Job Reductions Seen Persisting After Citigroup Cuts,” Bloomberg, December 5, 2012.)
As an example, revenue in the investment banking and trading divisions at the 10 biggest bank stocks is estimated to rise 2.8% in 2012 to $148 billion; however, this is 32% below the 2009 levels, according to Coalition Ltd. (Source: “Wall Street Job Reductions Seen Persisting After Citigroup Cuts,” Bloomberg, December 5, 2012.)
Clearly bank stocks will not see the revenue from last decade, which will mean more restructuring and aligning the business for a lower trajectory in an effort to maintain corporate earnings. This, of course, is a double-edged sword. Companies need to keep costs lean to maintain corporate earnings; however, further layoffs will hurt the economy.
Obviously, the layoffs amongst bank stocks are higher-income positions, not easily replaceable and a drag to the economy. Bank stocks are also being inundated with more rules and regulations limiting areas in which they can drive corporate earnings. Again, this is a double-edged sword. The safety and security of the financial system is now paramount in comparison to the corporate earnings of any one of the bank stocks.
Chart courtesy of www.StockCharts.com
The shares of Citigroup have naturally risen on the news, as this is extremely favorable for shareholders. We need lean corporations, not bloated firms that are unable to generate corporate earnings. The real question is whether the laid-off employees can quickly get back to work.
Because of the increased leanness of American bank stocks over the last couple of years, any uptick in the economy would be extremely bullish. However, more layoffs will put a drag on the economy. It is impossible to predict the outcome. Unless the economy picks up in 2013, I expect to see further restructuring occurring at several more bank stocks.