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London banker bonuses set to shrivel as Brexit hits dealmaking

Tuesday, July 5, 2016 - 13:30
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Just be glad you have a job.

[LONDON] Just be glad you have a job.

That's the message London's investment banks will be giving their staff this year, with bonus pools set to be cut by at least a quarter, as the UK's decision to leave the European Union stymies dealmaking and threatens higher costs from moving staff, executives and recruiters said.

Some bankers won't even be that lucky, as a further round of job cuts in London are likely in September if client activity doesn't pick up, according to multiple banking executives, who asked not to be named discussing personnel matters.

"Lower revenues and lower profits mean compensation will be lower," HSBC Holdings Chairman Douglas Flint said in an interview last week, when asked whether Brexit will cut into banker compensation in London.

The Brexit vote has already resulted in turbulent markets and may put a chill on investment, another problem for European banks like Deutsche Bank AG, Barclays Plc and Credit Suisse Group AGthat are in the midst of dramatic reorganizations. The result will be an increase in "donut" bonuses - in other words, zero - for this year, and a broader review of compensation to cut costs in coming years.

GLOOMY OUTLOOK

"Reality is going to kick in - today it's about about job preservation, rather than bonuses," said Jason Kennedy, chief executive officer of recruitment firm Kennedy Group in London. "Things are going to change," and some people shouldn't expect any bonuses, he said.

London, the world's biggest centre for currency trading, cross-border bank lending and interest-rate derivatives, has lurched from one crisis to another since 2008, when tens of thousands of jobs were cut as Royal Bank of Scotland Group was nationalised and Lehman Brothers Holdings foundered.

Since then, the European banking sector has been hit with fines for past misconduct, with more than US$12.6 billion in penalties and settlements in 2015 alone.

Share prices reflect the gloom that record-low interest rates and slow dealmaking will continue to dent profit after the worst first quarter for trading since 2009.

Several European banks are down more than one-third this year, including Barclays, Deutsche Bank and Credit Suisse. That's heightened the pain felt by senior bankers who get a large portion of their pay in deferred stock.

"If we hadn't had the referendum results, this year was looking pretty tough anyway," said Jon Terry, a partner at PricewaterhouseCoopers in London, who estimates discretionary awards at European and UK firms may fall at least 25 per cent. "We haven't seen an end to various fines and compensation related to payment protection insurance and Libor. There are still billions of pounds being charged to the accounts."

BREXIT CATALYST

"Ever since the financial crisis, there has been a need for reshaping the spend on compensation costs," Mr Terry said. "Brexit is possibly one of the biggest catalysts for the next stage of reduction."

On the advisory side, Goldman Sachs Group has said it expects a slump to continue as uncertainty about what Brexit will look like chills investment. The vote has already led to multiple deals being scrapped or reassessed. Even before the vote, announced mergers worldwide were down 11 per cent from a year earlier, while global equity issuance fell by more than half.

"It's a great opportunity to blame Brexit, giving people the message 'you're lucky enough to have a job,'" said Stephane Rambosson, managing partner at executive search firm DHR International in London. Bonuses could fall 30 per cent or more in some areas, he said.

Morgan Stanley analysts said in a note on June 29 that revenue from equities for European banks may fall about 18 per cent in 2016, while fixed income and investment banking may decline about 13 per cent each in the same period.

The uncertainty caused by Brexit may add to a dour mood in the City, as London's financial district is known. Deutsche Bank said last week that a survey of staff found fewer of the bank's employees feel committed to the lender than they were a year earlier, with less than half saying they are proud to work at the firm.

"How the Brexit vote will affect bonuses is as much up in the air as Brexit itself," said Nicholas Stretch, a partner with law firm CMS Cameron McKenna LLP. "Exchange rates for working out bonus pools, deals, trading volumes, even the importance of London to global banks and possible redundancy or re-location programs, are all unknown."

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