Investment bankers are not the most popular fruit in the banking bowl. Reckless, entitled and liable to be rotten, they are being asked to change their ways. However, today's first quarter results from both Barclays and Credit Suisse underscore the extent to which big European banks need to keep their unpalatable investment bankers happy.
At Barclays, the investment bank generated 74% of group profits in the first quarter. At Credit Suisse, the investment bank generated 71% of profits over the same period. These are not marginal businesses filled with awkward reprobates: they are the profit engines for entire organisations.
The empowerment of the investment bankers is most notable at Barclays, where new chief executive Antony Jenkins has been preaching a mantra of transformation and change, and where new chairman Sir David Walker has lambasted investment bankers who still think they can swap jobs for higher pay. However, under Jenkins, Barclays' dependence on its investment bankers has increased considerably: in the first quarter of 2012, when bad old Bob Diamond was in charge, the investment bank generated just 49% of Barclays' profits.
Barclays' increased reliance on its investment bankers has not gone unnoticed by analysts. "Despite the rhetoric from management BARC remains dependent on the IB for profit," said James Chappell, banking analyst at Berenberg. Overall, Barclays results were "disappointing" and offset only by improved investment banking revenues, which were up £100m, Chappell added.
Most notably, Barclays' investment banking revenues benefited from growth the bank's equities and investment banking divisions (M&A and capital markets businesses), both of which were built up by Bob as part of his diversification strategy. Antony Jenkins has reason to thank his disgraced predecessor.
At Credit Suisse, reliance on investment banking profits hasn't increased, but nor has it been entirely curtailed. In the first quarter of 2012 investment banking profits of CHF907m (£628m) were negated by CHF1.8bn of losses in the corporate centre, making the investment bank an even more important profit-generator one year ago. However, even though losses in Credit Suisse's corporate centre have declined 80% year-on-year, profits in the investment bank increased 43% over the same period, versus a drop of 7% in private banking and wealth management - the second largest contributor to the Swiss bank's profits.Credit Suisse's investment bank is doing well. Its private bank isn't.
Investment bankers at neither Credit Suisse nor Barclays can complain about their treatment.
In today's call accompanying Credit Suisse's results, KBW banking analyst Andrew Stimpson noted that 'key risk takers' at Credit Suisse earned considerably more than key risk takers at competitor bankers in 2012. "Why was this?" he asked. Credit Suisse CEO Brady Dougan responded that performance at Credit Suisse's investment bank had considerably improved last year and that it needed to pay its investment bankers well, whilst sharing returns with shareholders.
Barclays' investment bankers also have reason to count themselves lucky. Despite all Jenkins' talk about reducing the share of returns going to employees, at 41%, Barclays' investment bank still has has a higher compensation ratio than its peers, said Chappell.
Nonetheless, efforts are being made to rein banker pay in. Pay per head for investment bankers at Credit Suisse fell 22% in the first quarter, to CHF76k. At Barclays' investment bank, the compensation ratio was down to 41% from 43% under Bob Diamond in the opening months of 2012.
Before the investment bankers at Credit Suisse and Barclays get too self-satisfied, Brady Dougan and Antony Jenkins may want to remind them of the debt they owe to their broader organisations.
Profits by business area are only part of the story. At both Credit Suisse and at Barclays, the investment banks continued to expose the parent institutions to considerable risk. Risk weighted asset at Barclays' investment bank totalled £182bn in the first quarter, 46% of the total. At Credit Suisse, risk weighted assets in the investment bank totalled CHF173bn, 58% of the total. Yes: investment bankers are supremely profitable, but there's a cost to that. This is why pay is likely to fall further in future.