UBS badly needs to cut compensation costs, Deutsche Bank already has - but not enough

If ever there was evidence of how much UBS needs to cut back on staff costs in its investment bank, just look at its latest quarterly report - so far, its compensation has fallen by just 17.9% year-on-year and headcount is actually up on Q2.

UBS currently employs 17,878 people in its investment bank - over 100 more than the previous quarter and an increase of over 800 since this time last year. Don't get too excited, though; because of a change of methodology, over 600 staff previously allocated to its corporate center are now considered part of its investment bank, which skews the figure.

And, although most people affected by the bank's 3,500 redundancies have been informed, few had actually left by the end of September. In the UK, which is predominantly investment banking, there were 6,934 staff in the third quarter, compared to over 6,800 in Q2.

This doesn't disguise the fact that despite a pre-tax loss of CHF650m in its investment bank (largely down to the CHF1.8bn rogue trading incident), UBS is still being comparatively generous.

Compensation costs year-to-date in the investment bank dropped by 17.9% on 2010, meaning an average payout of CHF264.8k (188.4k). Meanwhile, quarter on quarter, pay fell by 10.4% to an average of CHF75.3k.

Although the compensation ratio is only 41% when DVA is included, when that's stripped out (along with the costs related to the Kweku Adoboli case), it becomes an unsustainably high 89%.

UBS also spent CHF154m on restructuring costs related to staff in its investment bank in Q3.

Deutsche Bank has cut pay a bit, but needs to strip out more costs

By comparison, Deutsche Bank, which also reported its Q3 results today, is a beacon of prudence when it comes to pay. In its corporate and investment bank, compensation accrued in the third quarter was slashed by 37% on the same period last year to €835m (727.9m), or an average of €54.3k (47.3k) per employee.

Pay in its investment bank is also exaggerated by the fact that it doesn't include operational and support staff in the headcount figure. It does, however, include global transaction banking employees, who are paid less.

Year to date, however, compensation in corporate and investment bank is a healthy €278.9k (243k) per head, or a 7% decline on the same period in 2010.

However, while it cut back compensation, Deutsche incurred a huge €2.3bn in 'general and administrative expenses' in Q3. This left a cost income ratio of 88% in the past quarter, suggesting additional cuts are required. In corporate banking and securities the situation was even worse - the cost income ratio was 95%.

Pre-tax profits in this division were also miniscule - coming in at €70m, despite a reduction in expenses. This can be attributed to a 38% decline in revenues during the quarter.

Headcount in Deutsche's investment bank also increased slightly in the third quarter to 15,364.

Headline trading figures for UBS don't look great; equities are down 30% year-on-year, while FICC has fallen by 23%. The one positive for the Swiss bank was equity advisory work, which increased by 33% compared to Q3 2010. Even here, though, revenues have fallen by CHF104m year to date.

At Deutsche Bank, meanwhile, debt sales and trading revenues have fallen by 34%, to €1.5bn, compared to Q3 2010, while its equities division saw a 41% drop, to €384m.