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Monday, August 19, 2013

Record banking profits = On-going lay-offs . . . What gives?

Corporate profit increases did not deter bank from firing employees
Banking layoffs have been focused on mortgage divisions
By RJ Tayaban

Here’s a paradox to start the day with – the major banking industry is raking in record profits, yet at the same time seems hell-bent on sacking everyone in sight. With net incomes totalling a combined $40 billion in the space of a single quarter, why on Earth is it still necessary for thousands of jobs to go?

Just this week, Bank of America, Wells Fargo and JPMorgan Chase all confirmed that more employees were being given their marching orders. Wells Fargo will be getting rid of 126 jobs in its mortgage arm as it heads toward its 763 redundancy target, Bank of America will be losing another 209 workers and JPMorgan Chase is laying-off staff by the hundred as part of its 15,000 staff-reduction plan.

Citi has also said goodbye to over 120 employees in the last couple of weeks and confirmed that more redundancies are on their way. So considering that more money is coming in than ever before, why do more and more workers seem to be heading in the opposite direction?

Well, the first thing to bear in mind is that most of the redundancies are falling within the mortgage arms of the banks. This is something that was expected all along as there is likely to be a significant fall in demand for mortgages and refinance loans as national average interest rates slowly climb.

Mortgage applications rose as home loan rates declined
Despite record low interest rates, lay-offs continued
Over the past few years, mortgage rates have hit all-time lows and prompted the most incredible uptick in mortgage applications in recent history. People were scrambling to save small fortunes, which required a small army of workers to handle and process. However, this has cooled off quite a bit over recent months and is set to continue slowing as interest rates go back up. In figures, the Mortgage Bankers Association predicts that things will decelerate by at least 40% in the refinance market in Q3 compared the previous quarter.

So that’s one of the reasons the banks don’t need quite as many staff as before – the next is the way in which most of the redundancies form parts of plans put into place years ago. Taking Bank of America for example – it was announced in 2011 that a full 30,000 jobs would be cut over the coming years, which is a target they’re still nowhere near but seem to be making some headway at least.
Profit margin is increased by maintaining worker productivity while cutting human resource costs
Cutting costs at a faster rate increases profit margin

More recently, JPMorgan Chase said at the beginning of the year that it intended to lose 20,000 workers before the end of 2014 – all in the name of cutting expenses. This would include around 4,000 roles in community/commerce banking and over 15,000 staff in the mortgage arm. And just before this, Citigroup also warned that 11,000 redundancies were on the way following already huge lay-offs affecting a quarter of the whole company.

All in all, the banking industry in the US became one of the most notorious for heavy lay-offs over the past couple of years, with a total of 26,000+ redundancies already recorded.

Increasing banking revenue becomes more difficult with low home loan interest rates
Revenue growth has been weak despite cost cuts
An altogether more curious reason for the lay-offs is the fact that despite profits being at all-time highs, revenue growth is proving extremely difficult. The lowest interest rates in the history of the market are making top-line growth very difficult, therefore leading to staff cuts as a means by which to cut costs.

Perhaps one of the starkest messages being passed around by industry analysts and experts is that despite what happens in the coming months and years, it’s unlikely that most of these jobs will ever be brought back. Banks are going through some serious restructuring and reshaping efforts which for the most part don’t paint the best picture on the employment front.

But still, at least you can stop scratching your head now as to why record profits haven’t triggered the hiring spree you might have logically expected!

About The Author: RJ Tayaban wrote this blog post for MoneyListings. For more than 8 years, RJ has been covering news on investment, banking and finance.

* Image license: Xoneca; CC 1.0 Delphi234; CC 1.0; MHz'as; CC BY-SA 3.0 Debastein1; CC BY-SA 3.0