RBS's results are out. They're pretty good. Revenues in the largely fixed income currencies and commodities (FICC) dominated investment bank fell a mere 8% in difficult markets. Operating profit in the markets division rose 11% year-on-year as costs were cut. Investors are happy: RBS shares are up around 10% this morning.
RBS's traders performed particularly well in the first quarter. Special plaudits go to the bank's foreign exchange (FX) traders who achieved a mere 4% year-on-year reduction in first quarter revenues and stable trading revenues quarter-on-quarter. This is notable given that most other banks said the first quarter was dire for FX trading. Goldman Sachs spoke of "significantly lower revenues" in FX trading in the first quarter, as did Deutsche Bank. Analysts at Morgan Stanley have pointed out that FX trading volumes were down 30% year-on-year in the first quarter, making it tough for anyone to maintain revenues in the business. In these circumstances, a mere 4% drop is quite an achievement.
Superficially, RBS's rates traders also did pretty well. Despite a similarly tough quarter in the rates business they achieved a year-on-year increase in revenues of 61% and a quarter-on-quarter increase of 95%. However, as at Deutsche Bank, RBS's rates professionals had their efforts flattered by asset-sell offs and deleveraging. Minus this makeover, RBS CFO Nathan Bostock said revenues in RBS's fixed income currencies and commodities trading operations were down more like 20%, in line with the market. Given RBS's cost cutting efforts and restructuring this wasn't bad, Bostock pointed out.
The performance of RBS's traders also wasn't bad given the bank's increased risk aversion. RBS in the process of 'de-risking' its markets division. The bank didn't break out value-at-risk in its first quarter results, but last year risk taking across the markets business was down 18% as a whole and by 40% in rates trading.
Based upon their results, RBS's traders seem to be at least as good as traders as in other banks - if not better (in FX). However, the British bank is a notoriously bad payer and is forever being buffeted by political winds in the UK. Compensation across the markets business was cut by 4% to an average of £34k ($57k) per head in the first quarter, compared to $123k at Goldman Sachs and $84k in Deutsche's corporate and investment bank. Meanwhile, the British government is preventing RBS from paying bonuses in excess of 100% of salaries, something which CEO Ross McEwan said this morning that he would not be pretending was ideal.
So, why do traders at RBS stick around?
Several things come to mind:
1. RBS traders are better paid than people think. £34k per head is the average across all roles in the investment bank. While RBS may pay its support staff and junior bankers less than average, some of it's top traders are very well paid. The bank's most recent remuneration report revealed that three highest paid individuals below board level earned £2.3m, £1.6m and £1.1m in 2013. That may look modest compared to average pay levels at US banks in London, but it's not bad either.
2. The 100% bonus cap is meaningless. As we've pointed out previously, the 100% bonus cap at RBS is meaningless. It likely applies to no more than 100 people and in today's report RBS promised to "mitigate" it. Fixed allowances to compensate for the loss of bonus are inevitable,
3. RBS is an easy ride. Finally, and again as we've said in the past, RBS is an easy meal ticket. The bank is cutting costs, but top traders in its core areas (rates, credit, asset backed securities) are safe. While banks like Credit Suisse are pushing for a double digit return on equity in their investment banks, RBS is cool with returning just 7-8% in the medium term. In the past quarter, RBS's markets division achieved a return on equity of 9.4%. While other banks sweat to meet their ROE targets, RBS is already there. People there can sit back and relax,