Morgan Stanley Bankers Poised for Biggest Bonus Bump.

http://www.bloomberg.com/news/2014-10-09/morgan-stanley-bankers-poised-for-biggest-bonus-bump.html

Bond traders at JPMorgan Chase & Co. and Citigroup Inc. face the fastest-shrinking bonus pools on Wall Street this year, while Morgan Stanley investment bankers head for the greatest gains.

JPMorgan’s fixed-income trading revenue fell 14 percent to $10.6 billion in the first nine months of 2014, the steepest drop among the five largest Wall Street banks, according to data compiled by Bloomberg for the first half and analyst estimates for the third quarter. By contrast, Morgan Stanley probably had the biggest increase in revenue from advising on mergers and underwriting stock and bond deals, the estimates show.

Wall Street thoughts turn to bonuses this month as firms report third-quarter results, giving a sense of how they’ve done for most of the year and how much they will allot to bonus pools. While markets lulled by Federal Reserve intervention have crimped trading, investment bankers have fared better amid a surge in mergers and issuance of debt and stock.

“This will be a good year for investment bankers, and the largest banks have figured out a way to compensate their best individuals,” said Devin Ryan, a New York-based analyst at investment bank JMP Group Inc. In trading, “if returns are still challenged, and in 2014 they will be, that will impact where the compensation pools are for those businesses.”

Earnings Season

The six banks probably will post $15.9 billion in combined third-quarter profit, a 19 percent increase from the previous year, according to the average of analysts’ estimates compiled by Bloomberg. That’s driven by a rebound at JPMorgan, which may post $5.34 billion in earnings compared with a $380 million loss a year earlier caused by $7.2 billion in litigation and regulatory costs.

While the companies don’t disclose pay pools for business lines such as fixed-income trading and advisory, compensation is largely determined by revenue. Declines and gains don’t reflect which firms will pay the biggest bonuses. Wells Fargo, whose securities business is much smaller, European banks and other advisory firms haven’t been included in the revenue comparisons.

JPMorgan is first in rates trading and third in currencies, according to research firm Coalition Ltd. Citigroup Chief Financial Officer John Gerspach has said more than half of FICC revenue at the firm typically comes from those markets.

Even with the declines, JPMorgan and Citigroup are expected to remain the two biggest fixed-income trading firms, with $10.6 billion and $9.72 billion of revenue in the nine months, respectively. Morgan Stanley probably will be the top equities trader with $5.16 billion in revenue and Goldman Sachs the No. 1 investment-banking firm, generating $4.94 billion.

Compensation Pools

Goldman Sachs set aside $12.6 billion for compensation and benefits last year, equal to an average of $383,374 for each of its 32,900 employees, data compiled by Bloomberg show. Morgan Stanley allocated $16.3 billion to pay its 55,794 workers, or enough for $291,734 per person. JPMorgan allotted $10.8 billion, or an average of $207,368 for each of its 52,250 corporate and investment-bank employees. Actual pay varies widely within banks to reflect employees’ roles and seniority.

Within fixed income, credit traders were the most positive about their performance, expecting a 13 percent median increase in compensation from last year, according to a survey by New York-based recruitment firm Options Group, which polled 344 traders and sales people in August and September. Interest-rate and foreign-exchange traders predicted no change.

Traders in investment-grade credit at the vice-president level made $400,000 to $600,000 in total compensation last year, with high performers earning $800,000 or more, according to Options Group. Investment bankers working on mergers and acquisitions made $350,000 to $500,000 at the vice-president level, with outliers pulling in at least $750,000. Managing directors make significantly more.

Trading Declines

Lower trading revenue led JPMorgan CFO Marianne Lake to cut the 2014 expense target by about $1 billion to $58 billion because of the impact on pay, she said at a Sept. 9 conference.

If “volatility increases and markets revenues go through the roof, God willing, we would be willing to pay for that” with higher incentive compensation, Lake said.

Wall Street’s rising investment-banking revenue, led by Morgan Stanley and Goldman Sachs, isn’t enough to offset the drop in trading revenue, a much bigger component of industry profits. Total banking and trading revenue probably dropped 3.3 percent to $78.2 billion in the first nine months, data compiled by Bloomberg show. Investment-banking revenue makes up about a quarter of the total.

If trading declines persist, convincing banks that a shift is permanent, “there are more cost-saves to be had, not just from lower expenses on compensation, but also the number of people you have,” Mutascio said.

Pedestrians enter and exit Morgan Stanley headquarters in New York, U.S.