U.S. banks' results bode badly for Deutsche Bank bonuses

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Deutsche Bank has a problem. Although the German bank continues to insist that it will pay "normal" bonuses this year, it cannot afford to do so. U.S. investment banks' fourth quarter results, published over the past week, confirm this - particularly when it comes to fixed income.

We already know how well Deutsche's combined equities and fixed income sales and trading businesses did in the fourth quarter. In an update published on January 5th, Deutsche said the combined division suffered a 22% drop in revenues during the three months to December versus the previous year.

As the chart below shows, this means that across sales and trading as a whole, Deutsche did not do badly. Compared to the combined sales and trading divisions of U.S. investment banks, it ranked somewhere in the middle in Q4 - doing better than J.P. Morgan, Citi and Goldman, but worse than Bank of America and Morgan Stanley.

Nonetheless, in a note out today Morgan Stanley's banking analysts say Deutsche Bank looks particularly compromised by the weak fourth quarter in fixed income, currencies and commodities (FICC). FICC revenues accounted for 32% of the total at Deutsche's investment bank in the first three quarters of last year, compared to just 19% at UBS, 21% at Goldman Sachs and 29% at Morgan Stanley itself.

Deutsche is more exposed to inclement conditions for fixed income traders than some of its rivals.

This matters, because, after a year of hiring - often on guaranteed bonuses - costs at Deutsche's corporate and investment bank are elevated. They absorbed nearly 90% of revenues in the third quarter of 2017 and with the high-margin fixed income business struggling, there is nothing to indicate that things improved in the fourth. Every bank has to choose between keeping its shareholders and its employees happy, but at Deutsche this year the choice looks particularly pertinent.

In the circumstances, other banks might be parsimonious with bonuses. At Goldman Sachs, which is notoriously efficient when it comes to cost-cutting, compensation accruals were down 32% on the previous year in Q4. However, both Deutsche CEO John Cryan and Deutsche's co-head of the corporate and investment bank Marcus Schenck have promised to pay "normal" bonuses at Deutsche for 2017 after paying no performance bonuses for 2016. Room for manoeuvre is minimal.

The question at Deutsche is therefore what "normal" looks like. Even before last year's travesty, Deutsche's bonuses weren't great: in the 2015 bonus-round, Deutsche's MDs complained of having their performance pay docked as compensation was reallocated to vice presidents and associates instead. Will this happen again? Headhunters claim senior Deutsche staff are dubious, particularly as the bank is said to have recently hiked salaries for precisely these mid-rankers and to be trying to keep its people happy with non-monetary benefits like increased holidays. "They're doing all the things you do when you're not going to pay well," says one.

Deutsche reports its fourth quarter results on February 2nd and will announce bonuses around the same time. Until then, Cryan, remains optimistic. He said yesterday that the bank has entered the "third phase" of its turnaround plan - one in which the business will return to growth and regain market share. However, Cryan said something similar in March. Since then, Morgan Stanley's analysts say Deutsche has lost more fixed income market share than any other bank in the market.

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