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 Goldman Sachs said on Thursday that it set aside 16 percent less
money for compensation in the third quarter compared with the same
period in 2014. The fourth quarter, when banks determine how much
they will pay for bonuses, may bring little relief for employees.
Goldman's total trading revenue dropped 15 percent in the third
quarter after volume fell in fixed income, currencies, and
commodities. Many investors are reluctant to take on too much risk
in bonds and related derivatives until they have a better sense of
when the U.S. central bank will start raising benchmark interest
rates.
Other banks set aside less money for pay in the third quarter as
well. JPMorgan Chase & Co said on Tuesday that it had set aside 13
percent less money for compensation in the third quarter compared
with the same period last year.
When Morgan Stanley posts third quarter earnings on Monday,
Citigroup analyst Keith Horowitz estimates that it will have cut its
spending on compensation by 7 percent for the quarter.
Regarding the fourth quarter, JPMorgan CFO Marianne Lake said on
Tuesday that "markets are pretty quiet" so far this month. Any
declines in revenue may affect what the bank will spend on
compensation.
Bonuses across Wall Street could fall about 10 percent this year,
with traders taking the biggest hit, said Alan Johnson, managing
director of pay consulting firm Johnson Associates.
Investment bankers, meanwhile, will likely see higher pay, as the
environment for mergers and acquisitions remains strong. Deal volume
in the first three quarters totaled $1.02 trillion, up 11 percent
from the same period last year, Thomson Reuters data show. Goldman
tops the league tables with 299 deals as of the end of September,
generating $2.6 billion in M&A advisory fees so far this year.
FIXED INCOME TRADERS
For fixed income traders, however, "flat is the new up," said Mike
Karp, CEO of financial services recruiting firm Options Group.
Equities traders may fare better, he added. The weaker trading
environment is hurting banks, as are the costs of complying with new
rules imposed after the financial crisis.
Banks "are starting to restructure their pay strategy because five
or six years after the crisis they have extra costs," Johnson said.
Universal banks such as JPMorgan and Citigroup are also under
pressure from historically low interest rates, which depress revenue
from lending.
In New York City, Wall Street pay has traditionally had an effect on
things ranging from the city's budget to the price of real estate
and the fortunes of local merchants. At Vintry Fine Wines, located
near Goldman's 200 West Street headquarters in Manhattan, manager
Mike Martin said business has slowed in the last several weeks.
"I would have to assume that it has to do something with the
market," said Martin.
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BELT-TIGHTENING
To be sure, not every bank will necessarily cut bonuses by the same
amount, and declines can vary dramatically from one employee to
another at the same bank. The last two months of the year may end up
being pivotal for bonuses and change the amount that banks pay out.
But other signs of belt tightening at banks have already emerged.
Contractors in the investment banking division at HSBC Holdings Plc
in London will see their pay cut by 10 percent amid sluggish deal
activity, Reuters reported. JPMorgan has been cutting costs all
year, and is even asking some employees to pay for their own cell
phones, according to the Wall Street Journal.
Back in the first quarter, revenues were up substantially across
Wall Street, allowing banks to set aside more for compensation —
Goldman's pay pool rose by 11 percent as revenue rose 14 percent in
the first quarter from the same period in 2014.
In the second quarter, revenue slipped by 1 percent and pay fell by
3 percent, leaving compensation expense at the bank down by 1
percent for the first nine months. The first quarter, where revenue
was more than 50 percent higher than the third quarter, had an
outsized influence on year-to-date figures.
Brian Kleinhanzl, an analyst with KBW, said he believes Goldman
needs to cut more expenses to increase earnings in the future,
perhaps through cutting headcount. Goldman is reluctant to lay off
more staff. Chief Financial Officer Harvey Schwartz said on a
conference call with analysts on Thursday that the bank has already
cut traders by 10 percent in recent years, and does not want to cut
further because it believes markets will become more active.
Rivals are bracing for market revenues to remain disappointing, or
at least to be unpredictable. Deutsche Bank is shedding assets,
pulling out of countries, and cutting 23,000 jobs in an effort to
cut costs. Credit Suisse is planning to scale down its securities
business and focus more on wealth management. The bank is in the
middle of a strategic review under new Chief Executive Tidjane Thiam.
(Reporting by Olivia Oran in New York; additional reporting by Dan
Freed. Editing by Dan Wilchins and John Pickering)
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