US bankers’ bonuses to dwarf those in Europe

US bankers’ pay re­wards could out­strip their coun­ter­parts over the pond by 20pc, and the gap is set to grow,

The Sunday Telegraph - Money & Business - - Front page - By Lucy Bur­ton

EUROPE’S top bankers are on course to fall fur­ther be­hind their US ri­vals as Brexit un­cer­tainty, low volatil­ity and ris­ing share­holder pres­sure drag down bonuses, City ex­perts warn.

Traders are al­ready pre­par­ing for dou­ble-digit falls in bonuses after low volatil­ity made it dif­fi­cult to make money in 2017. Head­hunters warn that those at Euro­pean banks are more likely to be handed a “dough­nut” bonus – in­dus­try code for noth­ing at all – in the com­ing months as rev­enues con­tinue to lag US peers.

Ja­son Kennedy, chief ex­ec­u­tive of re­cruit­ment firm Kennedy Group, said the chasm be­tween US and Euro­pean­based banks would be wider than ever as Euro­pean banks held back cash due to po­lit­i­cal un­cer­tainty.

He pre­dicts bankers on Wall Street will be handed bonuses 15-20pc higher than those at Euro­pean ri­vals this year, or 10-15pc more for those work­ing at a US bank based in Europe.

That will dif­fer by divi­sion, with US merger and ac­qui­si­tion (M&A) bankers in for the big­gest wind­fall after the num­ber of Us-tar­geted deals reached a record high of 12,891 dur­ing 2017, ac­cord­ing to Thom­son Reuters.

Wall Street banks dom­i­nated the league ta­bles for both Euro­pean and US M&A last year, with Dealogic rank­ing Gold­man Sachs, JP Mor­gan, Bank of Amer­ica Mer­rill Lynch and Mor­gan Stan­ley as the top four ad­vis­ers by mar­ket share on both sides of the At­lantic.

EY’S Omar Ali said Don­ald Trump’s sweep­ing tax re­forms would only “heighten the dif­fer­en­tials” in the year ahead. “Be­ing a banker in the City and be­ing a banker on Wall Street are only go­ing to be­come more stark,” he said. “If you look ahead, given the US Tax Cuts and Jobs Act go­ing through, Wall Street is likely to get even stronger.”

The post-brexit drop in the value of the pound, mean­while, has failed to con­vince for­eign firms to take over UK ri­vals, with Dealogic data show­ing that the value of takeovers dropped to its low­est point in four years.

Envy, says one Wall Street banker when asked for his bonus pre­dic­tions, is a cor­ro­sive emo­tion. It is a feel­ing that will run through the City in the months ahead as the world’s largest banks hand staff their all-im­por­tant bonuses. A key part of the fi­nan­cial cal­en­dar, head­hunters ex­pect the pay­outs to ex­pose the widen­ing gap be­tween Euro­pean and US in­vest­ment banks as Wall Street giants tighten their grip on the lu­cra­tive ad­vi­sory mar­ket just as trad­ing desks face a slump.

Bonus day is now dom­i­nat­ing the agenda in the City as se­nior ex­ec­u­tives at ma­jor banks scrab­ble to fi­nalise the num­bers ahead of full-year re­sults. City re­cruiters say M&A deal­mak­ers are most likely to be re­warded, while trad­ing desks are ex­pected to suf­fer the most after low volatil­ity pre­vailed in 2017 de­spite a gen­eral elec­tion, two Bud­gets, an in­ter­est rate rise and the trig­ger­ing of Ar­ti­cle 50. Those at a Euro­pean bank are most at risk of dis­ap­point­ment – head­hunters warn their num­bers could be up to 20pc lower than their US peers this year.

“If you’re look­ing at pay­outs in North Amer­ica ver­sus Europe, I’d say the former will pay 15-20pc more [than Euro­pean ri­vals],” says Ja­son Kennedy of Lon­don head­hunter Kennedy Group. “At US banks within Europe, se­nior bankers will likely get 10-15pc more than their Euro­pean coun­ter­parts.”

Some traders may get “dough­nuts” in this bonus round, he says – ref­er­enc­ing an in­dus­try term for get­ting noth­ing at all. The twinge of envy as ri­vals cash in on big­ger re­wards has be­come a fa­mil­iar one at this time of year, with dough­nuts tra­di­tion­ally be­ing read as a po­lite re­quest to leave. That has changed slightly in re­cent years, with se­nior bankers at Deutsche Bank last year told they would get zero amid poor per­for­mance, a multi-bil­lion dol­lar le­gal bill, share­hold­ers left with­out a div­i­dend and thou­sands of job cuts. “Be­ing a banker in the City and be­ing a banker on Wall Street are only go­ing to be­come more stark,” warns EY’S bank­ing ex­pert Omar Ali.

“If you look ahead, given the US Tax Cuts and Jobs Act go­ing through, Wall Street is likely to get even stronger. The tax on cash that US multi­na­tion­als have over­seas is go­ing to get treated in a way that could stim­u­late eco­nomic growth [and could cre­ate] a big M&A boom. For me 2018 will just heighten the dif­fer­en­tials.”

Bank of Amer­ica has al­ready handed 145,000 Us-based staff a $1,000 (£744) cheque off the back of Don­ald Trump’s new tax plan, for ex­am­ple, with boss Brian Moyni­han fir­ing out an up­beat memo be­fore Christ­mas claim­ing the ex­tra re­ward was in the “spirit of shared suc­cess”.

The mes­sage stands in con­trast to the ones re­ceived by those work­ing at most Euro­pean banks, which are un­likely to ben­e­fit from Trump’s sweep­ing re­form in the same way and have strug­gled to snatch mar­ket share in the US.

“Prof­its are no­tice­ably higher in the US and bonuses tend to track prof­its,” says Dou­glas Mcwil­liams of the Cen­tre for Eco­nom­ics and Busi­ness Re­search (CEBR), adding that City bonuses have fallen from a high of £12bn in 2008 to less than £4bn since the fi­nan­cial cri­sis.

“Also there is more po­lit­i­cal con­cern about in­equal­ity on this side of the At­lantic, which tends to get re­flected in gov­ern­men­tal and share­holder pres­sure on bonuses. Peo­ple over here are es­cap­ing from scru­tiny by in­creas­ingly set­ting up bou­tiques where they get div­i­dends rather than bonuses.”

Al­though bonus sea­son is typ­i­cally shrouded in se­crecy, with bankers left sec­ond-guess­ing if they’ve been hard done by, the un­der-pres­sure bosses of Europe’s banks have made no se­cret of the fact that this bonus sea­son will be un­der­whelm­ing.

Credit Suisse chief Tid­jane Thiam, who agreed to a 40pc cut in his own bonus ear­lier this year, said in Novem­ber that staff should not ex­pect “any­thing spec­tac­u­lar” in their bonuses this year. The in­vest­ment bank­ing boss of Bar­clays – which is fac­ing a £1bn hit from Trump’s tax Bill – said around the same time that this year’s bonus round will be about “dif­fer­en­ti­a­tion”, sug­gest­ing pay­outs for those in poorly per­form­ing units will fare far worse than they might have done in pre­vi­ous years. And while sources say Deutsche Bank chief John Cryan is go­ing to make good on his prom­ise to “re­turn to our nor­mal com­pen­sa­tion pro­grammes” this year, the re­wards are un­likely to be meaty given share­holder pa­tience is wear­ing thin over the slug­gish turn­around of its in­vest­ment bank. “The pres­sure will def­i­nitely mount on the man­age­ment board if they don’t de­liver a de­cent fig­ure [in its full-year re­sults],” says Ingo Spe­ich from Union In­vest­ment, one of the bank’s top 20 share­hold­ers.

Share­hold­ers are in­creas­ingly con­cerned that US banks dom­i­nate in lu­cra­tive ar­eas such as M&A, a key money-spin­ner for in­vest­ment banks with ac­tiv­ity ex­pected to grow. As well as gov­ern­ing the mar­ket back home, where the num­ber of M&A deals climbed to a record 12,891 dur­ing 2017, ac­cord­ing to Thom­son Reuters, the US ti­tans Gold­man Sachs, JP Mor­gan, Bank of Amer­ica Mer­rill Lynch and Mor­gan Stan­ley all topped the league ta­bles for Euro­pean M&A ac­tiv­ity last year, ac­cord­ing to Dealogic. Their dom­i­nance is im­pact­ing on Euro­pean banks’ abil­ity to re­tain tal­ent – one City head­hunter said ad­vi­sory bankers in Lon­don will now “only move for a US house” in a race to get to the top of the food chain.

“There’s no doubt the big play­ers in the US have se­ri­ously out­per­formed the rest,” adds Vicky Pryce of CEBR. “A num­ber of the Euro­pean banks are still not pay­ing div­i­dends so you can’t jus­tify big bonuses. [There is also] reg­u­la­tory con­trol of bonuses in Europe, the gulf is ap­pear­ing partly be­cause of that. Nev­er­the­less the con­cern for EU banks op­er­at­ing in any fi­nan­cial cen­tre is that they can lose their peo­ple to oth­ers who don’t have the same is­sues with grant­ing bonuses.”

While Bank of Eng­land Gov­er­nor Mark Car­ney hinted that Bri­tain could re­view the cap on banker bonuses after the UK leaves the EU, a sug­ges­tion lawyers say is de­pen­dent on what the UK’S fu­ture trade deal is on reg­u­la­tory align­ment, Euro­pean banks will need to sig­nif­i­cantly up their game if they want to tear back mar­ket share from Amer­i­can ri­vals. Envy of oth­ers’ suc­cess might be a nec­es­sary in­gre­di­ent to spark ac­tion.

Out­side the New York Stock Ex­change, top; Lon­don’s Ca­nary Wharf, above Con­trast­ing for­tunes on ei­ther side of the At­lantic £317k me­dian bonus for MDS, Wall St 2017 121pc of salary me­dian bonus vs me­dian salary for MDS, Wall St 2017 $1.4tn M&A ac­tiv­ity, US 2017 £247k me­dian bonus for MDS, City 2017 93pc of salary me­dian bonus vs me­dian salary for MDS, City 2017 $856.3bn M&A ac­tiv­ity, Europe 2017

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