Shrinking stock prices will erode bonuses
Thought you had a big bonus? Think again.
While the world's stock markets gyrate in what is generally a downwards direction, banking - and particularly brokerage stocks - is fast heading for the floor. Suddenly bonuses don't look quite so big after all.
"If you're worrying about the equity markets, the last thing you want to do is to own a lot of high beta stocks which are susceptible to market movements," says Dick Bove, an analyst at Punk Ziegel & Co. in the US. He adds: "60% of the earnings of the brokerage group as a whole came from trading in 2006 - up from 40% in 2004. In these conditions, the main concern is that this key part of the business is going to slow."
Which banking stocks are liable to lose most? Bove points to Lehman Brothers, Bear Stearns and Goldman Sachs, which are particularly exposed to trading - the more predictable investment banking business generated 14% of revenues at Goldman last year, but 18% at Morgan Stanley, for example.
"A 10% move in the stock market will move Goldman 18% and Lehman 17%," says Bove. "It's great on the way up, but not so great on the way down."
It's also not so great if you happen to be holding a lot of stock in one particular firm. Although headhunters say banks like Merrill Lynch have significantly reduced the proportion of bonus paid in restricted stock, the industry norm remains 30% above a ceiling of around 100k.
Goldman Sachs stock fell 2% on Friday according to Morningstar, while Lehman fell 1.6%. Bove says they could have a lot further to go. "Brokerage stocks are still trading at very high valuations - Goldman Sachs is in the top 10% of its historic trading range."
