Why breaking up is hard to do in banking
There’s one main common denominator that drives executive pay at banks, and it’s not performance. The key driver in executive compensation in banking is simply the size of the institution.
In a rather illuminating research piece, KBW’s Fred Cannon argues that, for the sake of shareholder value, banks should consider breaking into smaller pieces. The reason that they don’t could be due to the fact that the executives in charge of massive banks like Goldman Sachs and J.P. Morgan would likely earn a much smaller paycheck.
The math is really incredible. Large banks, including Citigroup, Morgan Stanley, Bank of America and the two aforementioned firms, paid its CEOs, on average, roughly $58 million between 2010 and 2013. That includes base, bonus and stock awards. The median return of the five banks over that period was just 38%, according to KBW.
Smaller regional banks, meanwhile, pay its executives two-and-a-half times less than do bulge bracket firms. Those banks, including KeyCorp, PNC Financial and U.S. Bancorp and others, returned a total median of 101% over that period, nearly three times that of big firms. The difference in pay between large and regional banks was even greater when looking at non-CEO executives.
“We believe there is little doubt that regulation has punished the shareholders of most large banks, reducing profitability, trapping capital and limiting returns,” KBW wrote in the research note. “To us this suggests that the large banks should consider accelerating the sale of parts of their businesses or breaking up. But do managements have the incentive to pursue such strategies?”
It certainly appears that they don’t.
In the latest hiring roundup, Deutsche Bank is adding to its healthcare and compliance teams, two EU startups are growing rapidly and Pimco is taking an equities plunge.
J.P Morgan shocked Wall Street late on Friday afternoon by announcing that it’s fixed income and equities trading revenue could fall as much as 20% during the second quarter. Shares of other banks fell as well. We’re likely looking at an industry trend, rather than something isolated to J.P. Morgan.
Another day, another departure from Barclays. Global head of mergers Paul G. Parker is leaving the firm. He’s the third prominent former Lehman Brothers employee to walk away in the last two weeks. New York is being decimated.
M&A activity is back in a big way. April’s deal volume reached nearly $420 billion, the most since July 2007.
U.S. Attorney General Eric Holder is signaling that criminal charges will be filed against large banks that are known to be “too big to jail.” Despite pleas from bankers and some lawyers, BNP Paribas and Credit Suisse are likely to face criminal charges in the U.S.
UBS is on track to miss its 2016 profitability target, a serious concern for Chief Executive Sergio Ermotti. Analysts believe the Swiss bank needs to speed up its asset reduction program and cut more costs.
National Bank of Abu Dhabi plans to make 450 retail and commercial banking hires over the next year. The bank is particularly looking for people with experience in eastern Asia.
Buzz Around the Office
The director of strategy at PayPal went on an epic late-night (likely booze-filled) Twitter rant where he called colleagues out in a rather unique fashion, using misspelled curse words mostly. He was fired before he woke up.
Quote of the Day: “On the cost side of investment banks, restructuring will require drastic measures -- on top of the further headcount reductions which are likely,” –Philippe Morel, a London-based senior partner and managing director at The Boston Consulting Group, on Barclays and other struggling banks