EFG Hermes bonus cuts risk investment banker exodus

EFG Hermes decision to slash its bonus costs is sensible, but the investment bank still risks an employee exodus.

The bank announced today that it was aiming to slash costs by 20% this year having "elected to be aggressive with its cuts to its bonuses in 2010", adding that it was "fully aware of the possible implications of this stance for certain individuals".

The sad fact of the matter is that, despite the positive performance in its capital markets, advisory and treasury division last year, there's a real imperative to cut staff costs.

In the fourth quarter of 2010, the bank paid out E253m in expenses for its investment bank, and 69.6% of this was related to staff costs.

In itself this isn't a worry, but investment banking fee and commission revenue fell by 9% year-on-year (largely because of reduced brokerage execution), and its net operating margin came in at a worrying -9.6% in the fourth quarter.

Perhaps more concerning for the bank was how the unrest in Egypt earlier this year has continued to hit its brokerage fees. Around 30% of its fee revenue in this area comes from Egypt and it said in its annual report that "market conditions deteriorated significantly in 2011 as a result of the EGX closing".

By taking the decision to slash bonuses, admittedly at a time when most banks are being cautious about remuneration, the bank faces losing some talented investment bankers.

Revenue for investment banking activities at EFG Hermes rose by 92% year on year, on the back of closing 11 transactions worth $4.6bn. Surely, there will be no shortage of firms keen to hear from EFG Hermes investment bankers.