Morning Coffee: Deutsche Bank's strange bonus decision. The quant jobs that will still be here in twenty years
Deutsche Bank reports FY19 results today, and it seems like the decision has been made. The overall bonus pool for Deutsche Bank is down 20%, with discretionary comp at the investment bank likely to be more like 30%. But are the top executives going to share the pain? Last week, it was reported that all options were on the table for the Management Board, everything from zero to the full award. Now it appears that the outcome is going to be a compromise between the extremes.
It’s quite an odd compromise, too. The top executives are going to be waiving their personal awards, according to a spokesperson, but will still be getting the awards reflecting group performance. But the thing that’s gone wrong over the last twelve months is not the personal performance of Bernd Leukert or Christiana Riley, both of whom seem have had rather good years. It’s the group! Although Deutsche just reported its biggest headline loss since 2015, this is entirely driven by the one-off cost of the transformation program announced in July 2019.
That transformation program was made necessary by the long term consequences of strategic choices from before most of the current management board were in place. Arguably, there would be some case for cutting the bonus of anyone involved in the decision to waste most of the first half of the year on the Commerzbank merger talks, but responsibility for that surely rests with the Supervisory Board and its Chairman rather than anyone else.
Most likely, the decision has been motivated simply by the fact that it’s the easiest way to make the numbers add up. The total bill for the nine current members of the management board will be around €11m (plus another two for members who left during the year). That’s down nearly 60% on 2018, allowing Deutsche top brass to look their underlings in the eye and say that their pool has taken twice as much of a hit, rather than being protected.
What would be really interesting to know, though, would be whether the same logic has been used at the head of business unit level, just below the management board. To the extent that the renouncement of individual awards is meant to convey a sense of collective responsibility for the restructuring costs, can the heads of Corporate Banking and Wealth Management really not be included? Claudio DeSanctis only got Global Head status in November, but Stefan Hoops was bumped up with the July announcement and a large part of the overall strategy is built around his promises for the potential of corporate and transaction banking. Deutsche wants to keep people motivated and encouraged, but as we argued last week, sometimes the most profitable career move you can make is to show a bit of leadership on pay.
Elsewhere, is value dead? Is Big Data a fad? Have we reached peak employment in the financial sector? Bloomberg interviewed sixteen of the world’s top quants, including big names like Cliff Asness and Rob Arnott, about where they saw the future of the industry. Obviously this has to be taken as a bit of fun rather than a serious exercise – if these people really knew what “the future of quant investing” was, they’d already be doing it and they wouldn’t be giving interviews. But there are some really thought provoking ideas about current trends in quant investing and in markets more generally. (There’s also, as you’d expect, a certain amount of platitude, book-talking and buzzword bingo).
In so far as there’s a consensus, though, it seems like many of the quants interviewed are getting increasingly sceptical about whether there’s much more juice to be squeezed out of the orange when it comes to applying ever more sophisticated pattern recognition techniques to price data. There’s not much mention at all of “alternative data” as a reliable source of alpha either. What there is, is a great deal of interest in applying quant techniques to currently “unquantifiable” areas – like using natural language programming to analyse sentiment in CEO statements, or creating quantifiable and comparable metrics for ESG investment. If we were going to extract a prediction about the future hot areas for quant careers, we’d agree with Alfred Spector of TwoSigma – it’s likely to be less focused on “data science” and more on “human talent and effective teaming … highly experienced, intelligent, and creative researchers who can select from the plethora of machine learning techniques available and develop approaches that generate true value”
Other big banks might not have things quite as bad as Deutsche, but it looks like if your bonus was flat this year, you killed it. Single digit falls overall at GS and Citi, but that old cliché “skewed toward higher performers” is in action, and MDs have been asked to take a hit so that juniors can be paid. So there will be plenty of mid-teens falls even at the US houses. (Financial News)
You don’t need to have an accountancy qualification to be a CFO – in many cases, companies are looking for someone with capital markets orientation, like a former banker. (WSJ)
The lineup of presenters at the Goldman Sachs investor day was almost entirely male. Most of the key points of the day have been well-covered, but we notice that the “peer comparison” slides were mostly drawn up on the basis that Goldman’s peers are Citi, JPM, Morgan Stanley and Bank of America. Is this really a subtle hint that there are no more non-American bulge bracket banks? (Bloomberg)
We also note that the cost cuts in the investment bank aren’t intended to come from redundancies, but from natural wastage, systems improvement and relocating functions to less expensive cities. Goldman Sachs Birmingham? (FT)
When you are trying to make a career as a stand-up comedian, but your family wants you to be a lawyer or banker. This phenomenon is absolutely not restricted to any particular ethnic community (Vice)
Is your next business trip going to kill you? A specialist in the transmission of viruses in air travel thinks the risks are low even if it’s to China and very low if not. (Vox)
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