“It is a real relief to be offered an internship with a big US investment bank. Deciding to take an MBA is a big investment and I have been counting on a summer internship to help with fees,” says Elena Novokreshchenova, a first year MBA at London Business School.

Banks have been hitting the headlines for all the wrong reasons in the early part of 2008. Following the collapse in the market for sub-prime mortgages, banks like Citi, UBS, Morgan Stanley and Bear Stearns have had to write off $billions in what were once deemed high margin, acceptable risk securities.

All this is bad news for banks and could be bad news for MBAs looking to join on a big banking salary. Banks have been snapping up MBAs in ever increasing numbers in recent years. The 2007 TopMBA.com Recruiter Survey showed for the fourth year in succession a strong 23 per cent (24 per cent in 2006) increase in demand for MBAs into financial services, which account for 40 per cent of MBA placements at some schools. If the banks did switch off demand, this would leave a big whole in MBA opportunities.

How has the credit crunch impacted on the short-term outlook for banks? Negative equity in US property has led to record numbers of low-income families and individuals defaulting on their mortgages. The resultant losses incurred by banks with large sub-prime mortgage businesses have led to a break-down in inter-bank lending and liquidity. This has resulted in a sharp reduction in lending available for future mortgages, but also for private equity deals and corporate borrowing. The difference between this financial crisis and previous financial crisis is that there is no transparency for the extent of the problem and, combined with the threat of a US recession, this has fed into equity markets which have taken a recent downturn, exacerbating the billions of losses of some banks.

Chris Higgins of the Career Service at Wharton says “I started working at Wharton in April 2001, just in time to experience the dot.com and consulting crash. Demand for MBAs has been great in recent times, but it is cyclical and you never know what is around the corner.”

However, Diane Morgan, Director of LBS Career Service sees “a pretty good outlook. All the banks are coming on campus and hiring similar numbers to last year.” Claire Hudson of the Career Service at Manchester Business School agrees that “banking intern opportunities for summer’08 are as strong as ever.” Dr Simon Taylor, Professor of Finance at Cambridge’s Judge Business School feels “much of the bad news is out there. The banks are still robust and have been able to refinance to strengthen their balance sheets.” However, he cautions that “the situation could take a turn for the worse if the US economy slips into recession.”

Morgan believes banks are taking a longer-term view of their MBA hiring. “Several of them (banks) made the mistake of cutting back in 2002 and were left with a big gap in talent when the markets picked up,” she says.

Employers and students are backing-up this viewpoint. Sarah Thomas, Head of MBA Recruitment at Standard Chartered says, “MBA hires are critical to building our leadership”. Dee Clark, Investment Banking Recruitment Manager at Goldman Sachs in London says, "We recruit MBAs to develop future leaders and directors, add value and strategic thinking, diversity, international experience and networks."

Novokreshchenova adds, “I interviewed with several banks including Morgan Stanley, Merrill Lynch and Deutsche Bank and recruiters have been emphasising business as usual and their long term perspective”.

The entry points for MBAs into banks vary by firm. Novokreshchenova will join a generalist pool and be allocated to a project. However, as a general rule, MBAs are hired straight into one of the following departments: Corporate Finance/M&A, Sales & Trading, Debt/Equity Research, Structured Finance, Asset Management, Private Equity and Private Client departments, as well as back office functions.

According to Taylor, the areas likely to see a short-term cut back in MBA hiring, include Credit Derivatives, M&A, Private Equity, and Asset Management. Opportunities in Credit Derivatives, which expanded to $trillions in value in recent years and are the source of current problems, are likely to see big cutbacks. M&A often accounts for the largest number of new MBA hires and the big investment banks enter 2008 on the back of record M&A activity in 2007. Goldman Sachs headed the M&A league table by value of deals at $759bn in 2007. Morgan Stanley grew deal value by 27 per cent, CitiGroup, JP Morgan and Lehman’s followed closely with growth of 20-30 per cent. Much of the growth was fuelled by the private equity boom, which has come to an abrupt end, but M&A activity is currently forecast to drop by only 20 per cent, which would still be above 2006 levels.

Taylor believes that if the US economy does slow down, banks in the second quarter will have to shed some of their existing labour force to keep down costs. But he adds that “new MBA hiring is likely to be maintained, not least because young MBAs are relatively inexpensive compared to the seasoned professionals.”

The credit crunch may even lead to growth in other asset classes. For example, derivatives are a zero sum game. Laurent Kerviel’s $4.5bn loss for SocGen was a $4.5bn gain for traders in other banks and market volatility will create new openings for some MBAs. Companies seeking access to capital are also likely to issue bonds if the equity markets remain unstable and undervalued. Market Risk & Compliance departments may also see increased MBA hiring as banks seek greater security and control of risky investment classes.

Who are the new recruiters on the block? Taylor believes “banks operating in Asia are likely to be insulated to a great degree from the trans-Atlantic problems”. Thomas confirms that for Standard Chartered, “China, India, Korea, Singapore, Hong Kong and UAE are some of the key growth engines for the Bank” and they expect to increase MBA hiring to “between 50-70 MBAs” in 2008. HSBC and OCBC Bank in Singapore are also expanding rapidly and recruiting MBAs for Asia.

Banks serving Latin America are booming. In particular the Spanish-headquartered Banco Santander and BBVA are recruiting MBAs for positions throughout the region. Russian and Central European banks, especially those serving the oil rich regions, are also hiring actively.

Elena Novokreshchenova sees “big opportunities in the near future in emerging markets like Russia, but also across Latin America and Asia.” Unless global growth stalls, for which there is only limited evidence at present, Taylor believes “the opportunities for MBAs in the banking sector could still cool slightly in 2008, but the prospect is for strong long term growth.”

QS World MBA Tour is the largest programme of recruitment and information fairs for business school applicants. Now in its 14th year, the Tour will visit 72 cities worldwide this year, including Hong Kong on 8 Nov.

Source: Nunzio Quacquarelli, QS Top MBA Career Guide