LONDON - When does a divide morph into a gulf? Ask European investment bankers who are set to watch their pay differential with Wall Street rivals widen in this year’s bonus season.

Combined annual investment banking revenue at the five biggest U.S. groups - comprising fixed income, equities and advisory services - rose by 3 percent last year. European rivals, which start reporting when UBS unveils its results on Tuesday, are expected to have suffered a cumulative 2 percent revenue decline, according to UBS analysts.

Assuming lenders pay out the same proportion of revenue in salaries and bonuses as they did last year, average pay at Deutsche Bank’s commercial and investment bank could decline by 7 percent to around $119,000, based on the division’s staff numbers in the third quarter. At Goldman Sachs, average pay last year was $337,000, down a mere 3 percent.

Those averages mask significant differences between business lines. Wall Street firms benefited from a 16 percent increase in equity trading revenue; fixed income was down 2 percent and advisory services were flat. European rivals, by contrast, will be collectively weighed down by a projected 6 percent drop in fixed-income revenue, even though equities rose by the same amount.

Average pay at Goldman Sachs dipped largely because the bank has been hiring. By contrast, Deutsche Bank and other European peers have been shedding staff. The revenue gap should allow Wall Street firms to offer more attractive pay packages, boosting their global market share. Even in Europe only Deutsche Bank ranks in the top five banks by revenue, according to Coalition data.

That leaves the likes of Deutsche Bank and Credit Suisse – where investment banking revenue is projected to have fallen by 2 percent last year – in a remuneration bind. Banks routinely defend high pay as necessary to attract the top talent they need to compete. But it is harder to justify when revenue is shrinking.

Underperforming share prices add to the pressure, as a chunk of bonuses are usually paid out in stock that is locked up for several years. Even Barclays, where combined markets and advisory revenue is projected to have jumped by nearly a tenth last year, trades at a miserable 40 percent discount to its tangible book value.

European rainmakers may lament the growing transatlantic pay gulf. But as long as trading revenue remains squeezed, and share prices in the doldrums, investor scrutiny won’t ease up.

CONTEXT NEWS

- JPMorgan is boosting its bonus pool by 3 percent for 2018 after its investment banking division topped industry charts throughout the year, according to a Reuters report on Jan. 10 citing people familiar with the matter.

- Those in the equity trading division are expected to do especially well after JPMorgan’s equity markets revenue was up 17 percent in the third quarter of 2018 over the prior year.

- By contrast, Deutsche Bank’s management board has decided to cut the lender’s 2018 bonus pool by around 10 percent in an effort to cut costs, Bloomberg reported on Jan. 8.

- Bloomberg, citing unnamed people familiar with the matter, also reported that bonuses would be paid more selectively in an effort to retain talent. The bonus pool could change, depending on fourth-quarter earnings figures, the report said.

(Editing by Peter Thal Larsen and Karen Kwok)

© Reuters News 2019