View from City Road: Warburg sets the seal on an Eighties revival

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The Independent Online
Did the 1980s ever really end, or did they just go quiet? SG Warburg's staff costs are up 54 per cent in a year, with performance pay soaring. The whole securities business is back on a merry-go-round of poaching, as top analysts and traders win million-pound packages. Corporate finance departments have stopped worrying about jobs and are back in business.

Warburg's profits rise has set the seal on this recovery. The share price was, however, ungratefully marked down afterwards. One reason was probably profit-taking. A better one was second thoughts about the figures, since so much of the improvement was from market making and proprietary trading. The sharp fall in the market last Friday was a useful reminder of mortality.

As Britain's flagship investment bank, Warburg has been following American competitors such as Goldman and Salomon by employing its capital more aggressively to trade on its own account. With its formidable expertise, this makes sense, though it would be reassuring if Warburg was more forthcoming.

Unlike Salomon, which publishes proprietary trading results quarterly (and lost dollars 92m in the first nine months compared with a dollars 932m profit a year ago), there is no clue to how much Warburg made. These highly volatile profits should be separated from the run-of-the-mill market-making results.

Mercury Asset Management, the 75 per cent-owned subsidiary, also did well, but the additional risk in Warburg is reflected in a prospective price/earnings ratio of 11, compared with 15.8 for Mercury. As Warburg becomes more of a trader, there will be mistakes, but it remains a good long-term bet.