This clearly isn’t 2007. Nor, despite some similarities is it 1987 or 1998. By some measures it’s not even a real market correction at all. Even so, if you’re employed by a U.S. investment bank and have already received your bonus for 2017 you can be forgiven for feeling relieved.
While most U.S. investment banks announce and pay bonuses in January, most European banks announce and pay in late February and March. As such, European banks’ bonus pools remain potentially “fluid.”
“Many European banks have still not finalized their bonus pools,” says Jon Terry, a PwC partner who consults on financial services pay. “They therefore still have an opportunity to take the current situation into consideration.”
Whether they will actually do so, is a different matter. Banks like UBS, Credit Suisse, BNP Paribas and Deutsche have their financial year-ends in December. Although Deutsche has indicated that it will take the bank’s performance at the start of this year into consideration when determining its bonus pool, Terry says most banks determine bonuses entirely historically: “The fourth quarter didn’t end well, and banks are not going to wait to penalize people both for the end of 2017 and for anything that happens at the start of 2018,” Terry says.
Senior bankers agree. “Allocations to analysts and associates were made in late December,” says one Barclays MDs. “Directors and managing directors were decided in January and the numbers will be communicated on February 23rd. Technically, there could still be some movement, but I doubt this will happen.” If anyone suffers, therefore, it will be the more senior staff at director level and above.
Bonus pools are most exposed at banks whose year end falls in March, or later. At both Nomura and Macquarie, for example, the financial year that includes most of 2017 will only come to an end on March 31st 2018. Any losses relating to market movements now will therefore be factored into their coming bonus pools. It won’t help that at Nomura, for example, profits in the wholesale bank were already down 58% year-on-year in the first three quarters.
Of course, it’s debatable whether the return of volatility will be bad anyway. Credit Suisse has expressly said that the VIX ETN which it “liquidated” this week was fully hedged and will therefore have no impact on its profitability. Banks like Goldman Sachs have spent the past few years bemoaning the lack of volatility and should welcome the renewed opportunity to discuss trades with hedge fund clients (as long as those clients aren’t so spooked that they just sit one the sidelines). And the prospect of higher inflation and interest rates should at least be good for the macro desks which many banks built preemptively in 2017.
Even so, this could be a good year in which to have been paid early. “When the tide recedes the shipwrecks are revealed, but they are more likely in crypto currencies and vol ETF funds where individual investors may well have lost a lot of money than the investment banks,” says one HSBC managing director, before adding the caveat that – “European numbers are already set and unlikely to change unless we get a much bigger unraveling in the market.” An MD at Unicredit agrees: “The bonus numbers won’t change now unless a bank has a horror show on a particular product.” Bankers who have yet to be paid might be reassured, but they could also cross their fingers, just in case.
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