Royal Bank of Scotland is the latest bank to unveil its Q3 results and, perhaps predictably, its vastly shrunken investment bank continues to drag on profits. Like its peers, RBS has put aside hundreds of millions for litigation costs - £400m ($640m) in charges related to the FX rate fixing probe and £562m in total litigation costs – but it has failed to capitalise on the FICC revenue upswing enjoyed by competitors. So, why is pay still high relative to its better performing peers?
Revenues in RBS’s corporate and institutional banking business were down by 23% on the same period in 2013 to £831m. Its investment bank was labelled the “elephant in the room” by analysts after relatively strong performance elsewhere and ominous musings from CEO Ross McEwan that it will “continue to actively manage the business down” if it doesn’t produce the returns expected of it suggest that more job cuts could be coming.
However, headcount in RBS’s investment bank is still shrinking and, even relative to other banks making swinging cuts, looks particularly diminutive. It has 4,000 people in the unit – only the private bank with 3,500 employees has fewer – down from 4,300 in Q2 and 4,800 in September 2013. When you consider that RBS has historically taken on 300-400 graduates in its markets business, who usually sign up in Q3, actual reductions in headcount are likely to be greater.
Barclays is cutting 7,000 investment banking jobs, but even this this was only 27.5% of its total headcount and UBS, which retreated from large swathes of investment banking business areas, still has 11,881 employees there.
If RBS’s investment bankers are metaphorical doormat within the organisation, then pay packages don’t reflect this. The bank has booked £666m in staff costs so far in 2014, down from £841m last year, but this is still £166k a head. Yes, this is down from £175k last year, but exceeds average compensation accrual at Credit Suisse (£152k), which has had a relatively positive Q3, and is close to UBS (£179.1k), which hiked up pay this year.
In the circumstances, RBS’s investment bankers don’t look like value for money. Cost income ratio in the division on an adjusted basis has swelled to 109%, up from 99% in 2013. The bank’s Ulster Bank franchise, now firmly back in the fold as a ‘core’ business area and described by McEwan as a “star performer”, has 4,500 employees which have cost just £239m so far in 2014.
RBS is reliant on fixed income business following its retreat from equities and advisory businesses, and a number of divisions disappointed. Credit was down 36% to £198m for the quarter (not helped by RBS's winding down its US asset-backed operation) and rates – which slipped from £297m last year to £240m in Q3 2014 – was singled out as the one business area that had a “weaker quarter than expected” by CFO Ewen Stevenson. Currencies performed better than last year in Q3, but so far for 2014 revenues are down by £167m.
Stevenson added that RBS’s FICC business also lost out by the fact that it’s no longer in leveraged finance or commodities, which helped flatter the results of its peers.
RBS’s traders are struggling against a reduction in risk appetite, though. Risk weighted assets (RWA) declined by a further £24bn in Q3, or around 16% of the total, and the bank says it’s on target to hit its £100bn reduction target by the end of 2014.
While there were no specifics on where cuts in it investment banking may occur, mutterings from McEwan that “costs are an issue” in the business, together with the fact that it has a cost-income ratio target of 60%, suggests that RBS’s tiny investment bank will continue to shrink.