Lazard outlines cost cuts to boost profit with weak outlook

Thu Jul 26, 2012 12:18pm EDT

(Reuters) - Investment bank Lazard Ltd (LAZ.N) said it plans to cut costs -- including bankers' pay -- as it readies for Europe's fiscal troubles to weigh on its revenue for months to come.

Lazard said on Thursday that its costs are too high compared with its revenue, a dynamic that halved its second-quarter profit. The New York-based bank aims for cost cuts to boost its operating margin by more than 10 percentage points from current levels, even if business conditions do not improve.

"We're not assuming some magical recovery of times past," Chief Executive Ken Jacobs said in an interview.

Lazard is only the latest Wall Street firm to announce cost cuts, and its costs are high compared with many other firms. The bank has used lofty compensation packages as a way to woo and retain top bankers from larger rivals, and is paying out big money for previous years' deferred bonuses that are now coming due.

Jacobs declined to provide specifics about the cost-cutting plans, but said the results would become more evident by year's end once the company has finalized its bonus decisions.

Lazard earlier this year outlined an operating margin target of 25 percent by 2014, and reiterated that goal on Thursday. The target compares with its current margin of 14.1 percent.

"We are confident the expense initiatives we have under way will bear fruit in 2013," Chief Financial Officer Matthieu Bucaille said on a conference call with analysts.

The investment bank expects to pay out $341 million worth of compensation in 2012 that had been awarded four years earlier, 18 percent more than the $289 million it had to pay out in 2011.

Still, Lazard expects to report a compensation-to-revenue ratio of 60 percent this year, down from 62 percent in 2011, even if market activity remains feeble. The bank hopes to lower that ratio to the mid-to-high 50s over the long term.

"The real challenge is, in a difficult macroeconomic environment where confidence is being upended on a regular basis, it's tough to really have a steady flow of activity," Jacobs said.

REVENUE DOWN, EXPENSES UP

Like most Wall Street firms, Lazard's key businesses are facing big challenges.

Mergers and acquisitions activity fell 25 percent worldwide in the first half of 2012 as the European debt crisis and uncertainty about global economic growth led companies to hold off on buying rivals or selling themselves.

The asset management business has also been difficult, as clients hold on to more cash and highly liquid securities because of weak investment returns.

Lazard earned $30.8 million, or 24 cents per share, during the second quarter, representing a 50 percent decline from the $62 million, or 48 cents per share, it earned a year earlier.

On an adjusted basis, Lazard earned 25 cents per share, in line with the average analyst estimate, according to Thomson Reuters I/B/E/S.

The company's operating revenue dropped 7 percent during the period, while compensation expenses barely budged. Non-compensation costs rose, mostly due to higher occupancy costs.

Although the investment bank's merger-and-advisory business reported higher revenue last quarter, it was not enough to offset declines in its capital markets, restructuring and asset management businesses.

Lazard's ratio of compensation expenses to operating revenue rose to 62.7 percent from 58.1 percent a year earlier.

Lazard has been less successful in reducing costs than some bigger Wall Street competitors, which already have lower compensation ratios and have announced large staff reductions and become more aggressive about cost-cutting targets.

Goldman Sachs Group Inc (GS.N) raised its cost-cutting goal by $500 million, to $1.9 billion, when reporting earnings this month and Morgan Stanley (MS.N) said it plans to reduce staff by another 1,061 employees this year to reach a 7 percent headcount reduction over the course of 2011. Those two firms reported compensation ratios of 44 percent and 52 percent, respectively, last quarter.

But Lazard has made some progress: its annual awarded compensation as a percentage of revenue has dropped from the low 70s in 2007 to 62 percent over the past two years, Citigroup analyst Keith Horowitz said.

Lazard took a $25 million severance charge in the first quarter related to staff cuts. Jacobs would not say whether more layoffs were ahead, but suggested that Lazard bankers would be getting smaller bonuses this year.

"We don't pay people until year end," he said. "So a lot of this stuff doesn't become evident until we get around to doing compensation."

Lazard shares rose about 1.6 percent to $24.78 following its report.

(Reporting By Lauren Tara LaCapra; Editing by Dave Zimmerman and Maureen Bavdek)