Davy staff feel the pain as market climate change begins to bite

In 2007 the stockbroking giant had big expansion plans, but job and salary cuts now lie ahead, writes Simon Carswell

THERE WAS plenty of gallows humour at the State's largest stockbroking firm, Davy, this week after management told staff on Monday that they would be seeking up to 75 job cuts and a reduction in pay.

Employees were informed in meetings on Monday that they would know by the middle of next month who would be losing their jobs after four weeks of consultations. Staff responding to work requests joked that they would know by August 15th whether they could complete such tasks.

The redundancies will begin in September and run until the end of the year. All remaining staff will have any earnings over €50,000 reduced by 5 per cent, so, for example, any staff member earning €100,000 a year will take home €97,500 following the cut.

It's not a massive cut, but even remaining staff will bear some of the pain from the dramatic downturn in the stockbroking sector.

Davy's has said that it was consulting staff on "proposals to rebalance its cost base" given that investors have fled the equity markets following the dramatic share price falls since early last year.

This will involve cutting the firm's 520-strong workforce by up to 15 per cent (75 jobs). Overall the firm is expecting to save less than €10 million on its costs.

"The turbulence in the international and domestic financial markets over the past 18 months has reduced trading volumes and there is a requirement to adjust the cost base in order to protect the profitability of the business going forward," the stockbroking firm said in a statement.

Just a month before the Irish stock market peaked in February 2007, as the Iseq index of Irish shares passed the 10,000 mark, Davy managing director Tony Garry was outlining ambitious plans for the firm. They involved doubling profits to €100 million within five years after management and more than 100 staff bought out the 90 per cent stake held by Bank of Ireland in a €316.5 million deal in 2006.

All was going according to plan until last summer. Senior Davy staff would have been toasting hefty bonuses and commissions last Christmas after a busy 2007 - despite markets turning, stocks boomed in the first half of the year.

Stockbroking firms had enjoyed a boom in their private clients' businesses as investors became flush with cash from juicy returns on equity and property dealings.

The profit contribution from Davy's private clients had more than trebled in recent years. By early 2007 Garry said it had accounted for half the firm's profits and indicated that it was the division that showed the greatest growth potential to drive profits to €100 million.

How quickly things have changed. The Iseq index of Irish shares has lost 55 per cent of its value since its peak in February 2007, shedding €67 billion. Property, pensions and private equity markets, in which Davy offered private clients numerous structured deals, have slumped. Equity trading volumes across Irish stockbroking are down 40 per cent this year.

Davy's offer to set aside €35 million to compensate credit unions for losses incurred on investments sold by the firm has not helped the firm's bottom line.

Substantial losses and margin calls on the high-risk Contracts for Difference (CFD) leveraged products has turned frustrated investors off shares, at least until markets show signs of bottoming out.

Davy's private client division is bearing the brunt of the costcutting. The division is now regarded as over-staffed, compared with other stockbroking firms, given the downturn.

More than half of Davy's staff work in this division and 50 jobs will go there, with a further 10 jobs from the institutional desk.

The firm's staff numbers have risen from 300 a decade ago, and from 470 to 540 in a recruitment drive following the 2006 management buyout, though about 30 employees have left in recent weeks in a natural staff turnover, as trading volumes have fallen.

The private clients' division took most of the new recruits. Such is the level of staffing in the division that not only are there portfolio managers - or PMs as they are known - who deal directly with private investors and handle their investments, there are assistant portfolio managers (APMs) and below them, portfolio manager assistants who help the PMs.

Their roles involve attracting new clients, a task that is likely to remain tough for some time.

Most APMs become PMs after 12-18 months. However, given that private client business across the stockbroking and banking sectors has plummeted, these posts will have substantially less to do.

As trading volumes have plummeted, so too have staff commissions. These would have rocketed in the early part of last year as they were based on the value of share transactions.

Davy will retain its offices in Cork, Galway and Belfast, but the firm has shown a willingness to cut costs at its Dublin base by planning to bring all its Dublin staff under one roof. The firm has staff in a building on Molesworth Street but intends to rehouse them in a building next to its headquarters on Dawson Street.

Like AIB, Davy has also put a freeze on its graduate recruitment programme.

Davy's staff are quick to point out that the measures being taken are to protect profit margins and keep the business lean, following the slowdown in market activity.

Certainly, the firm still has hefty profit reserves. At the end of last year, it had €96 million in retained profits on its balance sheet, up from €84.9 million.

There is plenty of cash in the coffers to pay any departing staff who subscribed to shares in the buyout from Bank of Ireland.

They must sell their shares as the firm only allows employees to be shareholders in the business. Up to 110 employees bought into the management-led buyout and some are expected to leave.

The firm has indicated a willingness to err on the side of staff's expectation on value than on its own and this will appease staff who borrowed heavily to buy into the take-private deal in 2006.

The speed at which Davy announced its cuts surprised some in the Dublin stockbroking community. The firm is regarded as more aggressive than its peers, and with a sizeable level of debt on its balance sheet following the 2006 buyout, the firm has had to move quickly when markets turn.

Such swift cost cuts in a bear market would be regarded as routine on Wall Street or in the City.

Davy is not the only firm to tighten its belt in the stockbroking community, though few other stockbroking firms would be as heavily staffed up as Davy's.

NCB cut 10 jobs from its 180-strong workforce in recent months. A spokesman for Goodbody Stockbrokers said it has no plans to reduce staff numbers.

However, the firm introduced a recruitment freeze at the start of the year and has not replaced departing staff, reducing its workforce by 7 per cent, from 330 to 305 employees so far this year.

Merrion Capital has reviewed its cost base recently but has no plans to reduce its staff numbers.

Dolmen Securities managing director Gerardine Jones said her firm ran a lean operation and even suggested that it was watching for possible acquisitions, though the firm had no immediate target. As market activity slows, mergers and acquisitions will become more likely.

Despite the cuts, Davy's staff still point to a strong performance on the firm's bond and institutional trading desks this year.

"These cuts are being made to protect profits," said one Davy's staff member. "This firm is very profitable and there are plenty of guys in here who will make a lot of money this year."

However, the earnings will be nothing like the hefty pay packets enjoyed in 2007 after a year of record transactions.

Most brokers are praying for some positive catalysts to spur the market and encourage cash-rich but nervous investors to put their hands into their pockets. However, few will invest while the global financial crisis continues to rage and share prices remain mired at highly depressed levels.

"Cash is king," said Eamonn Glancy, head of the private clients' division at Goodbody Stockbrokers. "But in the current climate people are unwilling to commit any money."