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Morning Coffee – Who got paid what, exactly, at UBS? Goldman Sachs bankers lose on the bonus but gain on the shares

Whatever else happens in his career, Ralph Hamers will be able to take pride in the fact that he was partly responsible for the biggest quarterly profit ever reported in the history of banking.  He was only CEO of UBS for five days of that quarter, admittedly, but he was in the top job when the acquisition of Credit Suisse was agreed, so in his shoes, we’d take it.  Sergio Ermotti probably has a better claim to the title, though, as he was actually in the seat when the deal was completed, resulting in a “negative goodwill” gain (the difference between the accounting value of CS’s assets and the price paid) of CHF$28,925m, which more than doubled the previous quarterly record profit, set by JP Morgan.

Obviously, the trouble with having your profits driven by a huge one-off accounting item like this is that it looks a bit blatant if you try to pay out a significant proportion of it to the bonus pool.  In terms of the actual profits earned by the UBS business, the answer was that they were a respectable but not record-breaking $2bn, partly offset by the loss at Credit Suisse.

So what did that mean for the employees?  A slightly more difficult question to answer.  This quarter’s results were the sort of thing that equity analysts have nightmares about after eating a kilogramme of melted cheese; they contained negative goodwill, all manner of fair value adjustments, one month of consolidation of a large acquisitions and items arising on conversion of US GAAP to IFRS.  By the end of the quarter, UBS had 45,000 more headcount than it did at the start of the quarter and a total compensation bill 27% higher than last year.  It had also reversed contingent compensation accruals of $400m and incurred “acquisition-related compensation expenses” of $240m.

Luckily, the truth is out there – it needs a bit of digging, but it’s on page 27 of the quarterly report.  Looking like-for-like at its own Investment Bank division, UBS reports that for the first six months of 2023, “Operating expenses decreased by USD 70m, or 2%, to USD 3,618m, mainly driven by lower variable compensation, partly offset by higher technology expenses”.  There isn’t any more detail given, but since the investment bank is looking at a 20% decline in Global Banking revenues and 15% decline in Global Markets, it might be reasonable to suppose that the run rate for “lower variable compensation” is a fall in the double digits.

It's not all bad news for UBS employees, though – the stock is up by more than 30% for the year to date, so last year’s bonus might be growing as fast as this year’s is falling.  It’s not even bad news for Credit Suisse people – the accounts also record that UBS set aside $500m for “retention rewards”, half of which was in cash and half in the same outperforming stock.

Elsewhere, Goldman Sachs bankers in London are seeing a similar effect; losing out slightly in their capacity as workers but doing well in their role as shareholders.  The publication of the Goldman Sachs International interim results is always an interesting alternative perspective from the main earnings announcement.  It isn’t straightforward – the mix of front-office and other roles in GSI is quite different from the group as a whole, and some of the compensation expense is recorded as a “management charge” payable from London to New York.  But nevertheless, page 8 of the international reporting sets the picture out admirably clearly.

As far as the number in the accounts is concerned, compensation and benefits for GSI staff were up 15% on the first half of last year, on the basis of headcount that was significantly reduced even allowing for the transfer of 300 asset management employees to another subsidiary.  However, if you strip out the effect of “changes in the fair value of share-based payment awards”, the number would be 10% down, and the report makes it clear that this is “mainly reflecting a decrease in estimated year-end discretionary compensation”.

So it seems that across the sector, bankers have good news and bad news.  The bonus letters at the end of the year are likely to be down, but management are more than likely to point to how well the stock price is doing.  It’s not exactly the message anyone was hoping for, but a slug of vested deferred compensation from earlier years at a better valuation than expected might certainly dull the pain of the 2023 bonus season.

Meanwhile …

The trouble with being a “platform” is that you tend to get blamed for other people’s failings.  Goldman Sachs’ transaction banking team is pulling back on the number of higher risk fintech clients it’s prepared to onboard, after having got a warning from the Federal Reserve. (FT)

X, which is to say Twitter, is apparently going to allow you to make phone calls and video calls from within the app.  This might mean that it gets banned on dealing floors? (Bloomberg)

“Forgetting that you signed up for a recurring subscription” is apparently a surprisingly important driver of the modern online economy. (Business Insider)

Exposures and interconnections can show up in surprising ways – one might not have thought that Morgan Stanley had much involvement with the Credit Suisse collapse, but it turns out that their joint venture brokerage with Mitsubishi UFJ had sold enough of the valueless AT1 debt to Japanese investors to get sued. (Bloomberg)

A raid on Bay Street – Jefferies’ expansion continues, this time by taking five dealmakers at a time from Barclays’ office in Toronto.  Bruce Rothney, Trond Lossius and James McKenna are confirmed, with another two names to be announced.  (Globe and Mail)

An even more detailed article explaining why a) the “secret memo” on Tiger Global is unlikely to be authentic but b) independently, it’s not a great time to be a Tiger Cub trying to find exit opportunities for some of the tech investments made in the last few years. (Finshots)

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AUTHORDaniel Davies Insider Comment

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