Bay Street
Canada's investment bankers should get a bonus cheque for the ages at the end of this month.
On the back of record equity sales and soaring trading revenues, the dealers are posting eye-popping numbers. Fourth-quarter revenues at the six bank-owned firms are expected to be up 51 per cent, year-over-year, to $5.2-billion, according to a report Monday from National Bank Financial.
But will stellar performance actually translate into serious paydays? That's the million-dollar question - literally - on the Street right now.
Expectations for compensation are sky-high, and with good reason. Capital markets employees will be among the strongest contributors to bottom-line performance when the banks report their results for fiscal 2009.
But rich paydays for bankers, so soon after the meltdown, are causing controversy around the world. And what's making the Street nervous, even scared, is the fact that the bonus cheques have become political footballs.
There is a serious policy issue here, as generous earlier compensation schemes led to ridiculous behaviour and poorly understood risk-taking. But there's also old-fashioned jealousy shaping the banker pay debate. And there's opportunism on the part of bank brass and HR types, who see an opportunity to ratchet down what is their single largest expense.
On Monday, data compiled by Bloomberg pointed to record bonuses this year at Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chases & Co.'s investment bank.
According to analysts' estimates published by the news agency, the three big banks will pay out $29.7-billion (U.S.) in bonuses. That payout would top 2007's previous record and mark a 60-per-cent increase from 2008.
Those U.S. banks will, however, hand out more in stock and defer more cash, given the call by regulators to relate compensation more to longer term results, Bloomberg said.
The Canadian payouts will follow strong results on the Street.
According to National Bank Financial analyst Robert Sedran, RBC Dominion Securities will post fourth-quarter revenue of $2.1-billion (Canadian), up 55 per cent from the same three months of 2008. Royal Bank of Canada has successfully built a globally competitive investment house, and its employees will want to be paid for it.
Working down through the rest of the Street, TD Securities will put $966-million on the top line, Scotia Capital's quarterly revenue will be up 56 per cent at $728-million, BMO Nesbitt Burns will see a 6-per-cent revenue rise to $709-million, CIBC World Markets' revenue will be up 41 per cent at $465-million and National Bank Financial will turn in a 49-per-cent rise to $296-million.
These revenues created a bonus pie that is being divided right now. Employees at the bank-owned dealers will find out just how large (or small) a slice they get later this month, or in early December.
Among investment bankers, there's a sense that this year's bonus should be up handily to reflect not only a great '09, but also the sacrifices that were made in the previous year. Bank directors may see an unwarranted sense of entitlement in this attitude.
Already, Canadian banks have introduced pay reforms to reflect new global attitudes toward risk. Cynics would suggest that the changes have far more to do with retention and downward pressure on cash compensation than with risk management.
The six big banks now all feature similar schemes, with greater use of deferred payouts and higher share ownership requirements. There are also clawback mechanisms that kick in if this year's money-making trade turns into next year's money-losing position.
The trend is not the bankers' friend going into this year's payday.
Suncor shops assets
Rick George has always been an under-promise, over-deliver executive, and that attitude appears to apply to the Suncor CEO's planned clean-up of Petro-Canada's holdings.
The knock on Petrocan was the company's poor focus - assets were all over the map, and many properties turned in poor returns. Suncor is expected to fix these problems with anywhere from $2-billion to $4-billion of asset sales over the next year.
What's got analysts puzzled is just what Mr. George and his team are promising to sell. Suncor released detailed asset disposition plans when it reported financial results last week, and didn't include properties in Libya and Syria that were widely assumed to be on the auction block.
Suncor is expected to move quickly on the sale of up to a third of its North American natural gas holdings. It is also shopping its Trinidad and Tobago natural gas assets. And Suncor wants to move smaller interests in the North Sea, as management highlighted plans to sell stakes in the Scott and Telford oil fields that Nexen is also working.
However, a number of analysts who listened to Suncor brass wrote reports that said while the Libyan and Syrian holdings were not presented as priority sales, Suncor would likely part with these properties in 2010. State-owned energy plays, such as China's oil and gas companies, are seen as natural buyers.
Canadian oil sands properties are expected to stay in the Suncor fold. "Management indicated that it is in no hurry to divest its Syncrude stake … or any of its oil sands leases," said a report yesterday from investment house Veritas. "Its criteria for divestiture are whether assets are non-material and non-strategic and it considers all its oil sands holdings strategic."
CIBC's infrastructure team
At a time when pension funds and other deep-pocketed players are pouring capital into infrastructure, CIBC World Markets is building its bench strength in the sector.
The investment dealer created a new infrastructure lending team yesterday under the leadership of managing director Peter Mastromarini and hired Lloyds Bank veteran Geraint Breeze as an executive director to back him up. This pair, along with CIBC veterans David Clee and Sami Zahur, will cover financial institutions, power and utility companies and governments that need infrastructure loans.
Andrew Willis