Compensation ratios may rise again for this year

Needless to say, most banks paid a substantially lower proportion of their revenues in compensation for 2009 than they have ever done previously. As we noted last week, had ratios been anywhere near normal for 2009, most bankers would have been far better paid.

The received wisdom has been that compensation ratios will remain low from now on. Although Goldman has said that it won't commit on whether 2009 compensation will become the new norm, James Gorman at Morgan Stanley said in February that the 50% compensation ratio of a typical year, "could be improved upon."

Last week, Citigroup analysts issued a report confirming this view, predicting "structurally lower" compensation ratios from now on. However, analysts from Keefe Bruyette & Woods beg to disagree.

In their opinion, 2009 was the anomaly, and in 2010 and 2011, cost income ratios (of which compensation is the major part) will return to long term norms - as shown in the graph below.

KBW's analysis applies only to European investment banks, but their reasoning applies equally to US houses.

They point out that compared to previous years, a disproportionately high percentage of 2009 compensation was deferred - something which will show up in future costs. More particularly, less in the way of prop trading could impact compensation - Credit Suisse said in 2006 that the cost income ratio in prop trading was just 43%, compared to 86% for other areas of its investment bank.

The bad news is that even if compensation as a percentage of revenue rises in 2010, overall pay may not. This is because revenues themselves may fall. KBW analysts are predicting a 6% year on year fall in revenues across European investment banks a whole in 2010, with more substantial reductions of 13% at Deutsche Bank and BNP and 18% at SocGen.

Source: KBW