RBS, bonuses and some really basic financial analysis
I side with Lord Myners and Alistair Darling in the current dispute between UKFI and RBS over the payment of bonuses.
As the Beeb says:
Last month, Chancellor Alistair Darling announced that the Treasury, as the major shareholder in the bank, would have the “right to consent” to how much RBS pays in bonuses and how they are paid.
RBS is said to want to pay £2bn in bonuses across the group for its performance in 2009, with £1.5bn going to its investment banking division, which is expected to make £6bn in profits this year.
£6bn in profits this year? It sounds like a lot doesn’t it? And surely these hyper-talented bankers need to be paid well, otherwise they might leave and then RBS would be less profitable – damaging the shareholders (i.e. UK taxpayers).
All sounds plausible.
It is also all totally wrong.
Take a lot at RBS’s most recent results. The Global Banking & Markets division (where these super-talented investment bankers reside) reported decent results (page 43 of the pdf document). In the first nine months of the year it generated an operating profit of £5.1bn – so the £6bn figure is certainly attainable. Total income before costs in the first nine months came in at £9.5bn.
But, and this is a big but, that very same division has the following assets (allocated to it by RBS high command) (page 44):
Loans & Advances: £157bn
Reverse Repos: £75.4bn
Cash and eligible bills: £63.8bn
Or total assets of £464.6bn.
That gives a lot of context to the operating profit of £6bn. Indeed it represents a return of only 1.35% on the assets employed! Hardly inspiring.
Being more generous and ignoring the costs, the £9bn income generated is still on a return of 1.94%.
To give context, if instead of being used to fund the ‘Global Banking & Markets’ division that £465bn had was used to buy simple, risk free 10 year UK government bonds (gilts – currently yielding 3.65%) it would generate an income of £17.0bn, or assuming similar costs (and they would probably actually be lower) an annual profit of over £11bn.
I’m sure RBS does indeed employ many very talented people. But let’s not pretend that big bonuses are the only route to profitability.