P&M Notebook: what you earn and where you earn it
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P&M Notebook: what you earn and where you earn it

Banking isn’t just dumb luck, but it plays a part — and the fortunes of the UK banks show exactly how.

The UK banks rounded off the 2016 reporting season last week, and in doing so, showed pretty clearly how much luck goes into a bank’s numbers, and the market’s reception of them. On the one hand we have HSBC, the well-capitalised crisis survivor, and occupant of the FSA’s “good, competent” quandrant.

Its numbers last Tuesday disappointed the market, despite a new buy-back and a solid beat from the bank’s trading businesses. True, there was a headline loss, but this came courtesy of a goodwill write-down in private banking. The real problem, for the shares, which were down 6% on Tuesday, was that the rest of the bank missed expectations.

For Barclays the picture was rosier. Every division in the investment bank was more than 30% up. Capital turned out better than expected. The bank announced it was ahead of schedule on its non-core asset disposals, and it would close the division six months ahead of schedule.

But a lot of what’s going on is simple currency moves. HSBC reports in dollars but earns mostly in a grab-bag of emerging market currencies, sterling for its UK retail operations, and euros for a good chunk of its global banking and markets business. At January 2017 currency rates, its revenues for the full year of 2016 would be down $2bn.

Barclays, meanwhile, is very happily the other way around. It reports in sterling but earns most of its wholesale revenues in dollars. So while, in sterling terms, its rates and FX division was up 32% and credit was up 34%, when restated in dollar terms its fixed income divisions were only up 9% year on year.

With the US firms averaging 43% up and the Europeans averaging 15%, according to Deutsche Bank’s research team, suddenly Barclays doesn’t quite look so sharp.

Other features of the Barclays results were the bank’s move to bring bonuses forwards. Partly this was just an accounting switch, in which the bank changed to recognising 33% of comp in the year it is awarded, rather than none.

But it also announced that it was cutting the proportion of deferred bonuses from 46% to 30% in 2016 — a boon for Barclays bankers which have seen the absolute size of their awards eroded over the last seven years from a £3.48bn pool in 2010 to 2016’s £1.53bn pool.

Bringing forward bonuses should disproportionately benefit the firm’s junior staff. Barclays said that awards between £500k and £1m would be 60% deferred, and 100% deferred over £1m. That suggests it’s not the firm’s MDs which are now getting more cash up front.

The firm said as much in its annual report — “for UK employees, average total compensation for MDs has reduced materially since 2010 (broadly in line with the reduction in the incentive pool). Over the same period, junior populations have been protected and have seen small increases in total comp despite a challenging business environment.”

Clearly the business isn’t totally about luck — some banks have picked niches and really stuck to them. That’s why GlobalCapital wanted to know what was going on with Santander in its covered bond trading business.

The ECB has been hoovering up bonds in secondary, primary supply is too slim and too tight to encourage investors to sell their existing holdings, so who’d want to be a covered bond trading house right now? The established covered bond banks are all happy to provide liquidity, but often trading sits as a support to the primary franchise, rather than an earner in its own right.

Santander, though, has grabbed substantial market share, and investor gratitude, offering tighter bid-offers, and being consistently available on electronic platforms. The bank didn’t share with GC how profitable the business was (and its competitors will doubtless accuse it of buying business), but it shows that neglected fixed income areas still exist — and offer opportunities for keen institutions to get involved.

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