TORONTO (Reuters) - Canadian banks are handing out 7 percent more in bonuses to their employees this year, in sharp contrast to slumping payouts in the United States and a sign of the relative strength of Canada’s financial sector.
Even so, Canada probably should hold off on exuberant celebrations. Performance-based compensation at smaller brokerages has declined this year, observers say, and the outlook for 2012 at even the big banks suggests a repeat performance is unlikely.
The country’s six biggest banks set aside about C$9.5 billion ($9.3 billion) for performance-based compensation in fiscal 2011, up from C$8.9 billion in 2010, according to earnings statements.
Some of that is due to acquisitions made over the past year, but setting that aside, the bonuses handed out this year are expected to be at least even with last year.
“I think you’ll find bonus numbers in the fixed income area being down, but you’ll probably find in the investment banking areas, in the hotter sectors like the mining and resources, it will be higher,” said Colleen Watson, president of executive search firm Watson Gardner Brown.
“All in all, just up slightly or sideways.”
The healthy bonuses underscore the strength of Canada’s big lenders, whose fourth-quarter earnings rose 34 percent to C$6.4 billion, despite narrowing interest margins and generally weak financial markets in the second half of the year.
Wall Street bonuses, by comparison, are expected to fall by between 20 and 30 percent, according to a closely watched study by compensation consulting firm Johnson Associates.
“You look at the performance of the U.S. brokerages, they’re down, and Europe is just a basket case,” said John Aiken, an analyst at Barclays Capital.
The wide gap is partly due to the quirky timing of the Canadian banks’ fiscal year, which ends on October 31, meaning they didn’t face the full effect of the recent weakening in financial markets.
But even in the weak August-October quarter, most of the Canadian bank-owned brokerages managed to beat the market’s modest expectations, and the fact that compensation expenses are rising shows that concerns about the outlook for banks in Canada pales compared with similar concerns in other countries.
“It shows even though we’re in a difficult capital markets environment, the Canadian capital markets continue to perform better than around the globe,” said Aiken.
“This is indicative of all the banks’ businesses in Canada relative to other nations, that even though we’re questioning what the earnings growth is going to be, we are still going to get positive earnings in Canada.”
Of the Canadian banks, Bank of Nova Scotia and National Bank of Canada showed the highest jump in performance-based compensation of 24 percent and 12.5 percent, respectively. Perhaps not coincidentally, neither bank has substantial U.S. or European operations.
Royal Bank of Canada, which has substantial European capital markets operations and is in the process of selling its U.S. retail bank, was the only big lender to pay out smaller bonuses, with a 1 percent decline.
Going beyond the big six banks, which own the country’s dominant brokerages, the bonus picture is murkier.
With fewer resources, “boutique” brokerages are unable to smooth out a rocky quarter the way the banks can, and they rely more heavily on bonuses for compensation.
And when markets soften, the bank-owned dealers tend to have an easier time holding on to business than the smaller players.
“The bank-owned dealers have a lower beta (or relation to market performance) to their compensation, so that when the market and business volumes are down, it doesn’t get as bad at a bank - you still get paid,” said veteran Bay Street headhunter Joe Kan.
“But when times are good, you don’t see the all the upside that you would at a good independent shop.”
However, with interest rates expected to remain at rock-bottom levels for the foreseeable future and stock markets under the thumb of Europe’s debt crisis, good times may be a ways off, meaning bonus levels may be hard pressed to repeat the 2011 levels next year.
Watson says she’s received few queries from bankers looking to jump to other firms, which she sees as a sign that those with jobs want to hang on to them.
“They’re sitting pretty quiet, but it’s going to be interesting to see going into next year,” she said.
Reporting By Cameron French; editing by Rob Wilson