RBS raises traders' pay despite slump into the red

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The Independent Online

Part-nationalised Royal Bank of Scotland today said it had increased staff pay and bonuses for investment bankers in the third quarter despite a 20% fall in trading revenues.





RBS, which is 83% owned by the taxpayer, slumped back into the red in the July-to-September period with losses of £1.4 billion, after accounting charges skewed results and amid lower investment banking returns.



But in a move likely to stoke further anger over pay in state-backed players, RBS revealed it increased its compensation ratio - staff costs as a percentage of revenues - to 40% for its Global Banking and Markets (GBM) team.



This was higher than the 32% in the previous quarter and the 35% a year earlier.



The news comes in a week of increasing pressure on bailed out banks after Lloyds Banking Group revealed a mammoth pay deal for its new chief executive and nationalised Northern Rock said it would pay outgoing head Gary Hoffman nearly £500,000 while on gardening leave.



RBS said underlying figures showed earnings of £726 million in the three months to September 30, up from £250 million in the third quarter as it continued to benefit from lower bad debts.



Chief executive Stephen Hester said the figures showed "steady progress" with its recovery plan, with statutory results hit by highly volatile accounting charges.



It had returned to profit in the first half, but this was also flattered by accounting technicalities.



Fellow banking giant HSBC also updated on third quarter trading today, saying that profits remained "well ahead of 2009" despite slowing growth and lower revenues.



HSBC's update echoed those of its US and UK competitors as it said investment banking activity had eased back against an unusually strong performance in 2009.



However, it said pay and bonuses set aside for staff in the third quarter remained consistent with 2009 as a percentage of income.



HSBC had already earmarked 2.5 billion dollars (£1.5 billion) in pay and bonuses for its investment bankers during the first half.



The issue of the new UK bank levy came to the fore as HSBC chief executive Michael Geoghegan hit out at the tax, saying the charge on UK-headquartered banks' global balance sheets "effectively places a tax on their emerging market growth" and risked disadvantaging UK players.



RBS estimated it would cost the group between £225 million and £250 million next year, rising to £350 million to £400 million in 2012.



Both bank bosses took the opportunity to blast the "too big to fail" theory that could lead to bank break-ups, which is currently being looked at by the Independent Commission on Banking.



HSBC has previously signalled it would consider moving its headquarters from the UK if regulations and tax plans became too onerous.



Trends at the banks mirrored those reported by fellow taxpayer-backed rival Lloyds Banking Group earlier in the week, with figures helped by bad debts.



Losses on loans turned sour were down 40% year-on-year and 21% lower since the second quarter, according to RBS.



Its retail arm saw operating profits rise 12% to £1.1 billion, partly boosted by higher margins on mortgage business as borrowers came off cheap deals on to its standard variable rate.



The group lent another £7.6 billion to small businesses, but said demand for credit was weak.



The bank's lending to all businesses has reached £30.9 billion since March and RBS confirmed it was on track to meet the Government-set target for £50 billion gross lending in the year to March 2011.



The bank's investment banking business had a tough quarter and market conditions were set to remain "challenging" in the fourth quarter, it said.



RBS defended its decision to set aside more pay in the face of falling revenues at GBM, saying it needed to pay competitive rates to retain staff as it continues to see star traders quit at an "uncomfortable" pace.



Mr Hester said the flow of departures had "been damaging for the investment bank, although not yet destructive".



However, he stressed the year-to-date ratio was 34% against an industry average of more than 40% and said the group was still to decide on the ultimate level of end of year bonus handouts.



HSBC painted a similar picture as its said third quarter lower trading revenues were offset by plunging bad debts - at their lowest level since early 2007.



Profits at the group more than doubled in the half-year - up 121% to 11.1 billion dollars (£6.8 billion) as a result of a lower loan hit, particularly in the US.



HSBC is preparing for an overhaul at the top after news that chairman Stephen Green is quitting to join the Government as Minister of Trade and Investment, while Mr Geoghegan is to be replaced by investment banking boss Stuart Gulliver.



Mr Geoghegan, who is to step down by the end of next month, said he is leaving the group with the "right strategy in place to navigate the economic uncertainty".



Shares in RBS and HSBC were lower today, with RBS down 4% and its rival nearly 2%.



Bruce Packard, financial analyst at Seymour Pierce, said there were worrying signs over revenues in today's updates and in the third quarter reporting season so far.



Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, added it was clear RBS faced a "long hard slog" despite signs of optimism.

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