JP Morgan Chase & Co plans to set up an offshore research department in Mumbai, in Wall Street's newest effort to lower costs in the face of weak equities business and a stricter regulatory environment.
The No 2 US financial services firm hopes to become more competitive in research by hiring junior analysts and support staff in Mumbai, where salaries for business school graduates can be a fourth of those in New York or London.
The initiative will not involve more layoffs, said Nick O'Donohoe, JP Morgan's global head of research. The aim, he said, is to shift responsibility for tasks like data collection, basic financial models and general number-crunching so that senior analysts can expand coverage and get more time to meet clients face to face.
"The long-term goal is to have higher productivity and lower overall costs," said O'Donohoe in an interview with Reuters late on Wednesday. "To some extent that will be driven by an ability to go offshore."
The initiative will mean an even tighter job market for finance professionals, especially if competing firms follow suit. Investment banks like Goldman Sachs Group, Morgan Stanley and JP Morgan have already cut between 15 per cent and 25 per cent of their research staffs, slashing compensation for those that remain.
But in the long run, such measures may determine whether investment banks can continue to maintain the current breadth of stock coverage, or can support research departments at all, say consultants who follow the business.
In that sense, JP Morgan may be at the forefront of the search for new business models. The potential strategies of constructing a low-cost operation center include selling research support services to other investment banks and selling higher end, customized products for institutional investors.
"Most major banks on Wall Street are mulling making changes to their operating model," said Jocelyn Cunningham, the head of the financial services department at Deloitte Consulting. "The current model doesn't work, so I think this is just the beginning."
JP Morgan expects to hire 40 junior analysts and support staff in Mumbai this year as part of a much broader ramp-up of its Mumbai office. The operation is expected to grow, said O'Donohoe.
New model
Research is funded indirectly by helping attract clients to banks' trading and investment banking businesses, two sectors that have dried up in the bear market.
A settlement expected to be signed with securities regulators over allegations of securities fraud will also lead to smaller research budgets.
The settlement, expected to be finalized within days, would add stricter regulations on funding research with investment banking revenue and require big firms like JP Morgan to provide alternative research from independent, outside firms.
Global spending on research has already been slashed by roughly $2 billion, or 25 per cent, since the peak of the market three years ago, according to estimates by Deloitte Consulting. Deloitte researchers expect budgets to be shaved by another $2 billion by 2005.
Much of the savings from lay-offs have been made, and the next level of solutions will range from working with competing firms on tasks like editorial and publishing to focusing their analysis to just certain industries, say consultants.
"India is a rationalisation of the cost of research and the declining revenues being made today," said Mike McKeon, managing partner within Booz Allen Hamilton's financial services practice.
JP Morgan has the advantage of already having a modern office park in Mumbai, which is known as Technopolis.
Equity research is a small fraction of a broader ramp-up by the company's commercial banking operations. The financial services company, which has 95,000 employees worldwide, plans to more than triple its existing employees in Mumbai to 1,100 by the end of the year.
The Mumbai research department will hire business graduates to do basic research and work on special presentations, build financial models and work on specific research jobs for the bank's clients. Basic production work like editing and some publishing will also be done out of Mumbai.
The first research hire is expected to be made by late summer, reaching about 40 employees by the year's end. That would be about 5 per cent of JP Morgan's total research staff. Currently the department has 705 employees, about 400 of which are analysts.