Bad luck to bankers hoping for big bonuses

While the Great Deal Drought of 2023 seems to have been a mercifully short phenomenon, sensible bankers won’t be spending too much time with supercar or luxury watch catalogues for the moment.  As Bloomberg points out in a useful explainer, the pass-through from current deal flow to year-end bonus pools is likely to be weak at best.

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For one thing, banks get paid when deals are completed, not when they’re announced. Although H1 of 2024 has been pretty strong for revenues, with the average of the five bulge bracket banks expected to be up 24% and some European banks up as much as 50%, these are big percentage gains from a very low base last year. 

That won’t matter so much if the second half of 2024 builds on the first, but this might be a bit too much to hope for.  There’s still a US election to go, and the uncertainty associated with an election year typically slows things down.  Interest rates appear to have peaked, but that might lead borrowers to delay issuance as well; private equity clients might also be tempted to sit on their hands a bit longer in the hope of getting even cheaper funding.

Just as important as the size of the pie, is its distribution. This year, bankers may need to share the gains with traders. While capital markets and advisory revenue is doing well, fixed income trading is much weaker. In the dark days of 2023, there was considerable cross-subsidy of investment banking division (IBD) bonus pools from successful trading franchises, and there’s likely to be an expectation this year that some money will flow the other way.

There are also mouths to be fed in the investment banking teams themselves.  The turn of a cycle is sometimes a very good period for compensation, but that’s because banks usually cut too hard during the downturn, leaving themselves short-staffed when revenues turn up. That leads to a tight labour market with lots of poaching, and a need to keep people happy if you want to keep them in their seats. 

For the moment, though, it seems that most big teams are staffed at roughly their desired cross-cycle levels. And when it comes to happiness, banks may err on the side of the shareholders. Although they didn’t exactly work many 80 hour weeks fixing offer documents, the investors feel like they made a contribution, and top management are likely to prioritize their claims at the end of the year.  As a popular analogy used to have it, there is only a leaky pipe between the revenue bucket and the bonus bucket, and it will take a bit more than the current climate to get them both overflowing.

Elsewhere, the usual way to get paid as a trader is to keep your head down, follow the rules, do a lot of business, make money for your employer and hope to be treated fairly at the end of the year.  Perhaps Matthew Connolly would have been content to follow this route, but that seems not to have been what the universe had planned for him.

On the other hand, the system of “trade derivatives, leave Wall Street, get indicted for the LIBOR scandal eight years later, get acquitted, sue your former employer for framing you” might have led him to roughly the same place.  After having been found by a court to be “the least culpable person” at Deutsche Bank, Connolly’s $150m lawsuit has now been settled, with consent of both parties.  Details have not been mentioned in court filings yet, but given the amount of shade Connolly has thrown over the years (and Deutsche’s presumed wish to get a long gone and little missed period of history fully behind it), it’s certainly possible that a lot of money changed hands.  Perhaps the story will come out if there’s ever a second edition of his book, “Target: A Scapegoat’s Guide To The Federal Justice System”.

Meanwhile …

Bill Hwang’s defense that “there’s no pump without a dump” doesn’t seem to have gone down well; despite arguing that he bought stocks because he loved them and didn’t sell on the way down, he’s been convicted of fraud and market manipulation. (FT)

Private equity executives apparently “have a bag ready” to leave the UK if the rumoured changes to taxation of carried interest come in.  (City AM)

… but they probably won’t be packing for Paris, as the New Popular Front is aiming to implement a 90% tax on income above €400,000, which might be another bump for the French financial centre. (Sky)

Banking just wasn’t stimulating enough for Nischa Shah, so she gave up her job at Credit Agricole to become a full-time YouTube influencer.  Her personal financial advice channel now makes $1m a year. (CNBC)

There’s no point looking for gratitude in the banking industry, but Colm Kelleher and Sergio Ermotti might still be feeling a bit aggrieved.  A little more than a year after having saved the Swiss taxpayer from having to own Credit Suisse, the finance minister keeps on begrudging them a salary that’s much bigger than her own. (FT)

HSBC has joined the trend to create “supergroups” in its investment banking coverage.  Going forward it will have five teams, with “technology, digital and financial services”. “consumer, healthcare and retail”, “resources, industrial and energy transition” trying to find synergies between very different industries, while “real assets and services” and “private capital” concentrate on investor groups.  This obviously means fewer global heads, and so might help cut down on the travel and expenses budgets. (Bloomberg)

NatWest Markets has appointed an insider to its top job – Jonathan Peberdy is a 20-year veteran of the bank. (The Trade)

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