It is not a good day for anyone working in RBS's markets division. RBS's second quarter results are out and they don't look appealing.
Like other European banks, RBS's investment banking operation has suffered from its exposure to fixed income currencies and commodities trading (FICC). In the first half of 2013 revenues in RBS's FICC business fell 28% compared to the same period of 2012 - more than at any rival bank. RBS's large rates business suffered in particular, with revenues falling nearly 50% over the same period.
RBS has already let it known that its markets business is being shrunk . In today's call, outgoing CEO Stephen Hester celebrated the reduction in markets headcount from 23,000 to around 10,000 and the fall in markets revenues from 60% to 20% of the total across RBS.
This is admirable enough. But RBS still employs 11,200 markets professionals. And their future looks increasingly bleak.
In the first half of this year, the pay accrued per head for RBS's investment bankers fell nearly 30% to £61k. This is far lower than the £100k per head at accrued at Barclays' investment bank. It makes RBS's markets business by far the worst payer of any major global investment bank.
Worse: there are good reasons to think that pay in RBS's markets division will fall even further. The business has lost much of the influence it had over company management: markets now accounts for only 11% of the operating profits at RBS, down from 26% last year. More importantly, costs at the business look worryingly high, even though pay has been cut.
In the first half of 2013, the cost income ratio at RBS's markets business was 77% - up from 59% in the same period of 2012. Analysts identified this an issue on today's call, pointing out that the business seems to have "an issue with fixed costs." Stephen Hester's response was to point out that there are still significant costs to be taken out. Costs in the markets business are on track to reach £2.8bn this year and they need to reach £2bn, Hester declared.
The chart below, taken from an investor note issued by Investec, illustrates the issue. Income at RBS has fallen dramatically, as have profits. Costs have proven intractable. Something has to give. And that thing will most likely be pay.
Ross McEwan's decision to preemptively give up his bonus for 2013 and for 2014 and to live off his £1m salary until at least 2017 also looks concerning if you're a senior RBS trader used to earning £500k or more. Henceforth, the case for earning big money at RBS looks even weaker than before. Last year, 93 people at RBS earned more than £1m. This year, we suspect that number will be far smaller.
McEwan's small package represents a break with the past, when banks bid up senior staff pay just to show how good they were, says Andre Spicer, professor at Cass Business school. RBS is now bidding down to show how restrained it is. After tax, McEwan will have a 'mere' £498k a year to live on with his wife and two daughters. This could prove a struggle - historically a million hasn't been enough for many bankers in the City. Fortunately, McEwan still has the £3.2m 'golden hello' he was given when he arrived in 2012.