UBS (NYSE:UBS) published its annual report for 2011 early Thursday, and while its financial performance for last year was already made public last month, the report shed new light on the bank’s compensation changes for the year. In what comes as no big surprise, the largest Swiss bank slashed its compensation pool for 2011 by a good 40% as compared to 2010. 
The decision clearly stems from the fact that UBS reported a 60% sequential decline in net income over last quarter, and its revenues took a hit in Q3 2011 from the $2.3 billion loss due to the unauthorized trading incident. Swiss competitor Credit Suisse (NYSE:CS), which has grappled with losses the last 2 quarters, has most likely come up with similar pay cuts that would be made public soon.
We maintain a $16 price estimate for UBS, and attribute the 12% premium over the current market prices to the pessimistic outlook for banking stocks in the wake of economic conditions and the European debt situation.
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Volatile market conditions are hardly conducive to trading operations, and minimal demand from companies for advisory & underwriting service in the second half of 2011 really hit UBS’s investment banking revenues. Employees at the bank’s investment bank will nevertheless have to bear the brunt, as they take home much less than what they did last year. In fact, investment banking employees were among the highest paid for the bank in 2010, with investment banking head Carsten Kengeter earning CHF 9.32 million ($10 million) – the highest in the bank. He will have to be content with a compensation of CHF 1.5 million ($2 million) for 2011 – an 80% decline.
The pay cuts do little to cover up the dismal margins the bank’s investment banking operations ended up with for the year. Margins fell from well above 16% in 2010 to under 4% in 2011, as seen in the chart above.
It must be noted that unlike some competitors like Goldman Sachs who actually reduced the base salary for some employees, UBS has gone ahead with a 5% increment in base salary for all employees on an average. The reduction in total compensation is completely a result of a reduction in their variable pay, or bonuses.Notes: