As we near the end of the year in banking, bonus season is looming into view. Not long ago, the size and structure of the payouts would have been subject to considerable speculation at this point in the cycle, but with bonuses more diminutive than they used to be, especially in Europe, the old bonus hubbub is now just a background murmur.
This makes predicting the size of payouts more difficult than ever. Not every bank provides figures allowing pay per head calculations and those that do classify investment bank employees differently, making comparisons difficult or meaningless. At the same time, most firms are busy shifting roles to "low cost centres" with the result that average pay per head is falling - although pay for those lucky enough to keep their jobs in London or New York is likely to remain the same.
At a macro level, most observers of banking compensation are predicting further cuts to bonuses this year. Johnson Associates, the Wall Street pay consultants, are forecasting that bonuses will be flat (fixed income trading) to down 20%. Options Group surveyed the 25% of top performers in each sector and found that while fixed income traders are expecting increases of 5% on their bonuses last year, equities professionals and investment bankers are expecting reductions of 5% and 4% respectively.
It helps to remember that while the second half of this year has been strong, the first half of the year was anything but. Banks' bonus calculations will therefore be clouded by the climate between January and June.
That’s the general outlook. Here’s what to expect bank by bank.
Outlook: Moderate. Barclays has stopped breaking out compensation spending in its investment bank, so it's impossible to know what's going on in any detail. However, Barclays' credit traders had an excellent third quarter and will be expecting some recognition. Barclays' business is generating reasonable returns, although there is still work to do in taking out costs.
What's been said: During Barclays's Q3 investor call, CEO Jes Staley made it clear that the screws are still on compensation: "The three big levers to tackle costs in any bank are people, technology, and real estate..." Earlier in the year, when things weren't looking so promising, Chairman John McFarlane told a board meeting that the weakness in the markets offered an opportunity to further cut compensation.
Outlook: Moderate. Bank of America has been investing in its investment banking and markets businesses and achieved a 12% return on equity in the quarter. It's in a position to pay, if it wants to.
What's been said: During the bank's third quarter investor call CEO Brian Moynihan said they continued to invest across rates and equities. He added that any falls in the compensation line are due to fewer people "going through the bonus pools", implying that the allocation to staff who remain is unlikely to change.
Outlook: Moderate. Citigroup also gives no indication of bonus allocations in its institutional clients unit (investment bank). However, it is still cost cutting.
What's been said: During the bank's third quarter investor call, CFO John Gerspach said core expenses in Citicorp (the combined retail and investment bank) fell "modestly" in the third quarter due to, lower compensation expense and other efficiency savings."
Outlook: Poor. Although Credit Suisse is insistent that its global markets and investment banking and capital markets divisions are absolutely essential to its business, it's engaged in a cycle of ever more ambitious cost cutting.
What's been said: At last week's investor day, Credit Suisse CEO Tidjane Thiam announced plans to take out a further $400m of costs by 2018 after some frenzied cost cutting this year. "We’ve accomplished a three year plan in what was less than one year," declared Thiam, adding that although the "rightsizing" of the global markets business was complete, the still need to cut costs to reach their desired return of 10%.
The reality so far: Credit Suisse is one of the banks that does break out compensation spending and headcount. We've shown average pay per head figures at the bank so far in 2016 below. In global markets, pay per head is falling, even as the proportion of revenues Credit Suisse allocates to pay is rising.
Compensation ratio in global markets: 49% in 2016, up from 39% in 2015
Compensation ratio in investment banking and capital markets: 65% in 2016, down from 66% in 2015
Outlook: Poor. Until Donald Trump was elected, Deutsche Bank's 2016 bonus outlook was the worst of the lot. This was partly because CEO John Cryan has shifted pay towards salaries instead of bonuses, and partly because Deutsche was having a tempestuous year. At one point, there was talk of paying Deutsche's senior bankers in bonuses comprised of toxic assets from the bad bank. What's more likely is that Deutsche's senior bankers will be paid small cash bonuses and heavy stock bonuses (again). The good news is that since Trump's election, Deutsche's share price has risen 36%. Deutsche's bankers will only wish it had done so after their stock bonuses had been allocated.
What's been said: During the bank's third quarter investor call, CFO Marcus Schenck made explicit reference to lower pay: "Compensation and benefits were down €330 million driven by lower cash bonus and reduced retention charges...." Schenck added that Deutsche hadn't decided how to structure bonuses for 2016, but said it would "make sense" to link senior staff pay tightly to the future direction of the share price.
The reality so far: Like Credit Suisse, Deutsche breaks out compensation spending and headcount. The resulting picture for pay per head in its global markets and corporate and investment banking divisions is not pretty at all. In global markets, compensation was down 26% year-on-year in the first nine months and Schenck said repeatedly that compensation costs were at the forefront of the bank's cost cutting plan overall. Deutsche is allocating a smaller proportion of its revenues to pay.
Global markets compensation ratio: 17%, down from 20%
Corporate and investment banking compensation ratio: 24%, down from 27%
Outlook: Moderate. Goldman Sachs is cutting average pay per head, but this might simply be symptomatic of the banks' focus on shifting roles to low cost centres like Salt Lake City, Mumbai and Poland. Pay per head in London and New York may well be stable.
What's been said: During the bank's third quarter conference call, CFO Harvey Schwartz reiterated the commitment to, "investing in our people" so that they, "continue to attract the best and the brightest that want to come to our industry." The implication is that Goldman understands the need to reward is staff.
The reality: Average pay per head at Goldman is falling, although this may be down to structural shifts in the location of staff towards places like Salt Lake City and India. Goldman is allocating a slightly higher proportion of its revenues to compensation.
Compensation ratio: 41%, up from 40%
Outlook: Moderate. J.P. Morgan doesn't say much about bonuses in its investment bank. However, it has gained a reputation as a steady and reliable payer.
The reality: J.P. Morgan does break out pay figures, but they're for its combined corporate bank and investment bank, making it difficult to discern exactly how well its investment bank staff are doing. Pay is falling marginally per head.
Compensation ratio in the CIB: 29%, down from 31%
Outlook: Moderate to poor. Morgan Stanley doesn't breakout headcount figures, but has kept its compensation ratio stable. The bank is, however, cutting costs. President Colm Kelleher indicated yesterday that Morgan Stanley isn't convinced that the big increase in fixed income trading revenues will endure. This might be because Morgan Stanley has shrunk its fixed income trading operations, but it doesn't bode well for bonuses (which always have a forward looking element).
What's been said: There's been no mention of bonuses specifically, but during Morgan Stanley's third quarter investor call, CEO James Gorman emphasized the bank's continuing efforts at shifting jobs to low cost locations (they want 1,250 there by the end of 2017). CFO Jonathan Pruzan said they've taken out $800m of expenses under "project streamline" and that there are another $200m to go by 2017. Pruzan said that the $800m was a "non-comp number", although project streamline covers both compensation and non-compensation figures. Does this imply that the $200m will come from compensation? Watch this space.
Compensation ratio in Institutional Securities: 36% this year, 36% last year
Outlook: Good. UBS has gone from being a bank with a reputation for paying small bonuses, to a bank with a reputation for paying quite large ones. Last year, for example, it increased its bonus pool by 15% even as other banks in Europe cut theirs.
What's been said: Nothing exactly, but optimists can cling to Andrea Orcel's July claim that cost cutting in the investment bank is over. Even though the cost ratio in UBS's investment bank looks stubbornly and dangerously high at 88%.
The reality: UBS enable a calculation of pay per head in its investment bank. This shows pay falling, but not by much. It also suggests that pay in UBS's investment bank is inordinately high compared to elsewhere, however UBS insiders assure is that this is simply because UBS doesn't include support staff in its investment banking headcount figure.
Compensation ratio in the investment bank: 41% so far in 2016, up from 37% last year.
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