Duncan’s Economic Blog

RBS, bonuses and some really basic financial analysis

Posted in Uncategorized by duncanseconomicblog on December 3, 2009

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

Securities: £117.6bn

Cash and eligible bills: £63.8bn

Other: £50.8bn

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.

9 Responses

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  1. thelocalgovernmentofficer said, on December 3, 2009 at 2:00 pm

    As I reach the end of my lunch break I wonder why the Taxpayers Alliance has so little to say about these public sector fat cats. If Council Chief Execs managing a bigger budget with a greater impact on people’s lives were getting half this salary they’d be having seven kinds of kittens. As it is their main concern seems to be protecting these chancers and scroungers from the threat of paying some tax on their ill-gotten loot.

  2. wheatles said, on December 3, 2009 at 4:32 pm

    P Duncan – think you should reflect Cash and eligible bills at 63.8? not a big shift in the ratio if you do, but for accuracy’s sake…

    kw.

    • duncanseconomicblog said, on December 3, 2009 at 4:44 pm

      Wheatles,

      Been a while!

      Thanks for that.

  3. Tim Worstall said, on December 3, 2009 at 6:16 pm

    “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.”

    Umm, only a thought, but what was RBS’ Treasury charging GB&M for their funding?

    I know absolutely nothing about how banks allocate capital internally but if they’re not charging their divisions the risk free rate (as you say, Treasuries) for their funding then they’re even worse than I thought they were.

    • duncanseconomicblog said, on December 4, 2009 at 9:12 am

      Tim,

      Total costs at the division are about £3bn – including staff. They don’t seem to be charging them much at all!

  4. Thomas said, on December 4, 2009 at 8:55 am

    Duncan, see my facebook! Still people willing to stick up for them.

    Vince is right – call their bluff.

    What has their performance been like in previous years? Does that represent a huge decrease in performance?

    • duncanseconomicblog said, on December 4, 2009 at 9:12 am

      To be fair Thomas – last year they managed the largest loss in UK corporate history. So some improvement!

      • Thomas said, on December 7, 2009 at 1:58 pm

        Yes – this is true….given their performance against that baseline they should be handsomely rewarded….

  5. […] economist and Left Foot Forward contributor, Duncan Weldon, outlined on his economic blog yesterday that RBS are employees have not even put in a good performance this year with a return on […]


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