Eagle Daily Investor

Banking on Bigger Bonuses

Would you like to get a big fat bonus check this quarter? Sure you would. And if you already received one, wouldn’t you want another?

You could join the ranks of Wall Street’s fattest cats, who run the biggest banks and financial institutions. They saw a surge in their 2012 bonus checks. Indeed, $121,900 is the average size of those bonus checks, which rose, on average, by $10,900, or approximately 9 percent, over bonus checks from the prior year. And all of those bonus checks add up to around $20 billion — which should provide some nice sales for plenty of luxury goods retailers in the coming weeks.

Now, that’s good news for bankers — but still not great news. After all, if you look at their latest year-end bonus checks, they’re still less than in 2010, when they got a bit more, at nearly $23 billion. Or, even better, the good old days that came to a quick close in 2008, when bankers got paid bonus checks adding up to more than $34 billion.

You might think that you shouldn’t celebrate the big-bonus-check rebound for bankers — but really, you should. The reasoning is that when bankers are paid more, shareholders get more in the process.

The key is to look at bank stock performances when bankers get paid more.

For the 2010 payout from the prior year, bank stock investors saw shares deliver more than 131% from the low to year end in total return, as measured by the KBW Bank Index (KBX).

And for the next year, when bonuses dropped, so did the bank stocks for investors, by 23%.

But for the current crop of checks being cut, bank stocks were up, just like the bonuses, by around 31% overall.

Banks are Better Stocks
The KBW Bank Index is Outperforming the General S&P 500

Now, it’s not just about the checks, but, rather, it’s about what’s been happening to bolster bank performances. In just the last year, more than 28,000 folks who were getting bonus checks weren’t employed at their banks any more. That means fewer costs and more production from those still running the banks.

And, with the recent series of announced further bank employee cuts, including JP Morgan’s (JPM) pending elimination of close to 19,000 jobs this year, along with other pending cuts, the move to become leaner is fully the way of Wall Street.

This situation means that, as the fittest survive the headcount cuts, the cost savings can result in better bank performance.

And so far for this year, banks, as tracked by the KBW Bank Index, are up overall by 6.1%.

Now, most banks are not paying a whole lot to their depositors with money market and CD yields on the floor — often less than 1%. And for shareholders, while stock prices are climbing, dividend payouts have fallen to an average rate of 1.9%. And this, of course, is less than the yields of the ever-stingy companies that make up the average payout for the S&P 500 at 2.1%.

However, there are some banks out there that are improving their performances, for both their bankers’ bonuses and for shareholders. One example is New York Community Bankcorp (NYCB).

The bank is located predominately in the New York City metro area. And, like other banks, it too has been bolstering the productivity of its employees at the bank. The results, though, are much better than the average for banks — not just in New York, but nationwide.

The Efficiency Ratio measures how much it costs a bank, external to interest costs, to earn a dollar in revenues. The lower the rate, the less it costs in overhead and employee compensation to generate sales. So, as banks cut employee headcounts and make the most of those still working, the better their profitability becomes.

The average right now for U.S. banks around the nation is 61%, meaning that, on average, it costs 61 cents to make a dollar, external of interest costs.

For New York Community Bankcorp, the efficiency ratio is 42%, meaning that it costs the company almost 20% less to make each and every buck.

Here’s the best part: the bank shares the wealth, not just by paying bonuses, but by paying shareholders. With a dividend yield of 7.49% and overall stock performance for the last four years of over 82 percent, you too can be a fat cat with a big bonus paid by your bank stock.

About Neil George

Contributor Neil George is the former editor of Personal Finance and other investment journals published in the United States, Germany and other nations. Prior to his career in financial media, he worked for more than two decades in six continents in senior positions in investment banking, bond trading, brokerage and asset management companies. His former firms include Merrill Lynch International Bank in Europe, Asia and the Americas, as well as U.S. Bank and Investec PLC. In addition, he worked to build a collection of independent public and private brokerage and fund management companies in Los Angeles and New York. He also serves as an adjunct professor and board member of Webster University's Walker School of Business and Technology. He has an MBA in international finance from Webster University in Europe and his bachelor’s degree is in economics from Kings College.

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