City bonus bonanza keeps on rolling

Schroders and Warburg reveal bumper payouts and higher staff costs n SFA confirms it is looking into Kepit liquidation share sale
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The Independent Online
Two of the City's leading investment banks yesterday announced big bonus payment rises, fuelling fears that bumper payouts may encourage risk-taking of the kind recently criticised by the Bank of England.

Schroders said that staff costs last year rose by pounds 109m to pounds 464m - an increase of 30 per cent. About half the increase was due to the payment of higher bonuses after the bank earned record profits of pounds 239m.

Meanwhile SBC Warburg, the Swiss-owned investment bank, disclosed that costs last year had risen by a third to $2.6bn (pounds 1.63bn), an increase it blamed partly on "performance-related compensation".

Schroders disclosed that staff costs per employee last year rose from pounds 78,500 to pounds 93,300 as the bank took on an extra 1,450 employees. The ratio of staff costs to income rose from 44.4 to 48.5 per cent. However, pre- tax profits per employee also rose from pounds 43,600 to pounds 48,000.

Win Bischoff, chairman of the bank, said that what the Bank of England had said about the dangers of the City's "bonus culture" was "a useful adjunct to the debate". But he stressed that Schroders operated a deferred bonus scheme and had done so for several years.

The increase in bonuses at SBC Warburg was accompanied by a 55 per cent increase in profits to $607m and a big improvement in its return on capital to 16.4 per cent.

However, the results were marred by confirmation from the Securities and Futures Authority that it was investigating the alleged mishandling by Warburg's of a large share sale late last year. At least two senior traders have already been disciplined over the episode.

Peter Corrigan, head of French equities, resigned last week and a derivatives trader has also left.

The allegations revolve around the liquidation of the Kleinwort Benson European Privatisation Investment Trust (Kepit) late last year.

Warburg was accused by Merrill Lynch, acting for Kepit, of deliberately marking down the prices of the shares just ahead of executing the trade, so disadvantaging the client to its own benefit.

As reported by the Independent at the time, the affair was quickly settled to Kepit's satisfaction after Warburg agreed to pay more advantageous prices, at a cost to itself of pounds 3m to pounds 5m.

Warburg said yesterday that as soon as it became aware of the allegations an immediate investigation was launched by its compliance department and the bank quickly moved to ensure the client had not been disadvantaged. It confirmed that the outcome of its deliberations had resulted in the departure from the bank of two traders.

At the time the Independent quoted a Warburg source as saying: "It's no big deal. This sort of thing happens the whole time. This was a programme trade. The timing had been pre-set and it was unfortunate that it occurred when prices were weak as a result of a rise in interest rates."

However, Merrill Lynch and others were persistent in their allegation that the prices had been deliberately depressed by market-makers and called on the SFA to investigate.

The prices began to fall after Warburg attempted to hedge the position ahead of execution. One source described the manner of the hedging as "inept though not deliberate".

The bank said one of the advantages it enjoyed over competitors was "the loyalty of its top professionals who are compensated as partners in the business in a way that aligns their long-term interests with those of shareholders and the bank".

SBC Warburg is now part of Swiss Bank Corporation, which announced a 29 per cent leap in total gross operating profits last year to $2.9bn.