Morgan Stanley can't afford this generosity to its investment banking staff
While everyone else cuts pay, Morgan Stanley is increasing it.
The bank disclosed yesterday that compensation expenditure in the group is up 8% year-to-date vs. 2010.
This is more generous than it seems. Nomura analyst Glen Schorr points out that the amount feeding through to employees will be up more than 8% because last year's compensation figure included the UK's bonus tax (Morgan Stanley paid around $270m in tax, suggesting this year's compensation increase is actually 14%.)
The higher compensation pool is likely to be divided between fewer people. Morgan Stanley doesn't break out headcount in its Institutional Securities business (AKA the investment bank), but it's almost certainly lower than it was. In July the bank was said to be contemplating thousands of redundancies and James Gorman spoke of "initiatives" addressing headcount in yesterday's
At first sight, Morgan Stanley's investment bankers merit the bank's generosity - especially in equities. Year-on-year, its equities trading revenues (including adjustments for its own debt) are up an impressive 19%. At Goldman Sachs they're up 2%. At JPMorgan, they're up 11%. At Citigroup and BAML they're down 2% and 13% respectively.
Morgan Stanley may be paying for performance. Yesterday, Gorman denied that the increase in compensation was due to guarantees for new traders and attributed it to the need to, "appropriately compensate those that are delivering returns for the franchise." It's possible too that MS felt the need to increase compensation for staff after worries about its exposure to the Eurozone led its share price to plummet last month. Yesterday, it revealed its net exposure to France was just $1.5bn at the end of September.
And yet, its generosity looks a little unwise. Analysts at JPMorgan Cazenove point out that when DVA gains are removed from yesterday's results, clean revenues for Morgan Stanley's investment bank were just $3.3bn in the third quarter. Total costs were $3.0bn. That makes a clean cost/income ratio of 91%. However well Morgan Stanley's bankers did between June and September, this doesn't look sustainable in the long term.
