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It’s grim tidings at the big four Scottish financial institutions – and lay-offs look likely as firms seek to slash costs, say analysts.

The share prices of Royal Bank of Scotland, HBoS and Aberdeen Asset Management all slumped by around 40% last week, suggesting any hopes of Scotland being isolated from the credit crunch were wishful thinking.

Does this mean redundancies are on the cards? Leigh Goodwin, an analyst at specialist investment bank Fox-Pitt, Kelton, thinks RBS could reduce headcount.

“We know that areas like structured credit are going to be well down and that people will be let go in those areas, and RBS is a player in the MBS market. Then there’s the synergies coming out of the integration of its wholesale division with ABN AMRO. We’re going to see a whole swathe of cost-cutting and the latter half of this year will be a bit of a bloodbath in this respect,” he predicts.

Alex Potter, an analyst at financial services group Collins Stewart, agrees that concern over a lack of capital in the wake of the ABN AMRO merger is driving down RBS’s share price, and adds: “They have a great exposure to debt capital markets and equity capital markets, both of which are subjects of investor loathing at the moment.”

What about HBoS? Mamoun Tazi, an analyst at the Man Group, reckons the hiring dynamics of its commercial banking division mean they will be slower to give employees the boot than investment banks. At i-banks, compensation comes in at 40-50% of revenues, which means headcount reduction is a way to cut substantial costs quickly.

Goodwin says it’s still not a pretty picture at HBoS: “A lot of its earnings have come from the corporate bank and that has been heavily involved in commercial property loans, and demand for those is going to diminish. And also I don’t see the money from its own portfolios of investments being anything like as good as last year.”

“There may well be some redundancies on the wholesale banking side, and the treasury business, which it has been investing heavily in, but I don’t think they’ll be on a big scale,” he says.

It’s not such a bleak outlook for Scottish financial services as whole. In the latest Scottish Financial Enterprise quarterly report, only 7% of respondents saw a reduction in headcount in Q4 2007, and 54% expect staffing levels to remain stable.