Posts tagged "RBS"

Cairn Energy faces shareholder rebellion over pay

67% of investors vote down pay report on day which sees similar rebellions at Cookson, Prudential and Resolution

Cairn Energy, which has spearheaded controversial oil drilling in the Arctic, has become the biggest victim of the “shareholder spring” with 67% of investors voting down its pay report.

There were a further 10% of abstentions at Cairn on a day that also saw sizeable rebellions at Cookson, the industrial group, and insurers Prudential and Resolution in protest at excessive pay awards.

Cairn, founded by its chairman and former rugby star Sir Bill Gammell, acknowledged last night that it had been “rebuked” but gave no indication that it would back down on its proposals.

“The board and I fully acknowledge the strength of the views expressed by our shareholders in some of their voting today,” said Gammell. “Cairn endeavours to meet the highest corporate governance standards and is conscious of its responsibility to ensure best practice and continue an open dialogue with shareholders at all times.”

Co-op Asset Management, one of the shareholders who voted against the remuneration package, said the lack of a promise by Cairn to withdraw its plans underlined why the government needed to make shareholder votes legally binding.

“We voted against the remuneration report on the back of Sir Bill’s £1.4m bonus award for moving from the role of chief executive to chairman,” said Abigail Herron, corporate governance manager at the Co-op.

“The methodology used for calculating this severance is dubious and the concept of moving from chief executive to chairman is against the UK corporate governance code,” she added.

Shareholder frustration followed critical comments from the Association of British Insurers and from shareholder advisory groups Pirc and Manifest before Cairn’s annual general meeting in Edinburgh.

Investors were also angered because Cairn was forced at an extraordinary general meeting earlier this year to scrap an additional £2.5m share award to Gammell to “compensate” him for moving job.

The payments were said by the company to reward him for completing the $6bn sale of the bulk of Cairn’s Indian business to mining group Vedanta, a deal which led to a major special payout to shareholders.

Meanwhile, at Cookson nearly a third of investors voted against the industrial material group’s boardroom pay policy – which has awarded £20m in shares to the group’s three most senior executives.

The group’s annual general meeting saw 31.8% of investors vote against a pay scheme that has been strongly criticised by shareholder advisory groups.

Cookson’s chairman, Jeff Harris, said the award was justified. “There is no suggestion whatsoever that this is in some way an example of reward for failure,” he said.

Under the terms of the scheme the chief executive, Nick Salmon, was given shares worth around £7m, with the finance director, Mike Butterworth, receiving shares worth £3.6m and the head of the ceramics division, François Wanecq, being awarded stock worth £9.3m.

The Association of British Insurers had issued a red-top alert – its highest level of objection – over the report while Pirc, another advisory service, called for a vote against the reappointment of the board.

There was also a similar size of rebellion at Prudential which had disclosed in its annual report for 2011 that its seven executive directors were set to share £30m in payments, including shares. Meanwhile, 20% of investors failed to back pay policies at insurer Resolution.

They join the ranks of big pay protest votes this year, which include opposition at Barclays, Xstrata and William Hill, as well as the enforced departures of chief executives at Trinity Mirror, Aviva and AstraZeneca.

Shareholders are frustrated that some business leaders have seen their pay soar at a time when profits have stuttered and share prices have been depressed by the wider economic gloom.

Promises by business secretary Vince Cable to tighten the grip of shareholders over executive pay also seems to have emboldened some more investors to fight back.

The rebellions, which are often undertaken without any public comments from major investors, are also believed to reflect wider public concern about executive pay levels at a time when many further down the employment ladder have lost their jobs.

And trouble is also now looming at bailed out Bank of Scotland with Pirc advising a vote against the remuneration report because of its concerns about international accounting rules. Pirc is also advising a vote against non-executive director Brendan Nelson who chairs the audit committee. The Association of British Insurers and ISS, another advisory body, have not raised issues about the RBS pay policies.

RBS declined to comment.

MPs consider RBS and Lloyds options

Committee will take evidence from experts including investment banks and institutional investors on what to do with stakes

An influential committee of MPs will on Tuesday hold a hearing into the potential sale of the taxpayers’ stakes in Royal Bank of Scotland and Lloyds Banking Group, as fears grow that the public could be left with a multibillion-pound loss on the shares.

The Treasury select committee will take evidence from City experts, including investment banks and institutional investors, as it attempts to establish that all options for the future of the two banks are being considered by the government.

The two banks were bailed out by taxpayers in 2008 with £65bn of public money but are now worth half that, and MPs have been told by Stephen Hester, the chief executive of RBS, that investors regard putting money into banks as “dumb”.

The select committee is holding its evidence session as debate rages across Whitehall about what do with the stakes. Officials from UK Financial Investments, which takes care of the taxpayer stakes, have conceded that selling some of the shares at a loss is a possibility.

There is speculation that a 29% stake in RBS could be sold for 35p a share to investors in Abu Dhabi. Shares were bought by taxpayers at 50p.

While some argue that the government should wait for the price to rise, the Liberal Democrats have also offered two plans.

The business secretary Vince Cable has called for RBS to be turned in to a business lending bank while the party leader, Nick Clegg, backs a plan drawn up by City firm Portman Capital to hand out shares in the bailed out banks free to the 45 million people on the electoral roll.

Andrew Tyrie, the Conservative MP who chairs the select committee and advocates running RBS commercially, said he wanted to be certain all options were considered before any sell-off went ahead.

Tyrie said: “We want to make sure all of the options are considered and the long-term interests of the consumer, as well as those of the taxpayer, are high up on the government’s agenda. The committee has repeatedly called for greater competition in retail banking. The structure of the market needs to be considered as well as the revenue.”

One of the analysts appearing on Tuesday, Manus Costello, managing partner of banks research at Autonomous, recently wrote an article with the former City minister Lord Myners calling for the government to “remove the shackles of quasi-nationalisation as soon as possible”.

But leading investors – who would be asked to buy the shares – are likely to argue that they do not want to buy more bank shares because of uncertainty over regulation and anxiety about further losses that could be suffered from loans granted ahead of the 2008 banking crisis. One leading shareholder said RBS and Lloyds had made provisions equivalent to 6% and 9% of their loans during the crisis but comparison with previous financial crises showed more would be needed. For instance, after the Latin American debt crisis, the figure was 10.5%.

Neither bank is paying a dividend even though the prohibition on payments imposed on RBS and Lloyds by the EU in return for state aid has now been lifted.

Next month’s white paper on the implementation of the recommendation of the independent commission on banking to ringfence high street from “casino” investment banks may have an influence on share prices in the sector.

Lord Oakeshott, the former Liberal Democrat Treasury spokesman, is urging the government not to rush ahead with a share sale.

“We didn’t buy RBS to make a quick buck and there is no rush to lock in a large loss. The government must set a new long-term strategy to make RBS lend to bolster small business and growth. The strategy must come before the tactics”.

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RBS poaches another Australian banking boss

Ross McEwan to move from Commonwealth Bank of Australia to replace Brian Hartzer as head of retail banking arm

Royal Bank of Scotland has once again turned to Australia to recruit a boss for its UK retail banking arm.

Ross McEwan, who runs the retail banking operation of Commonwealth Bank of Australia, the country’s largest bank, will join RBS to replace Brian Hartzer, who was hired from another Australian bank – ANZ – and is returning to Australia to take a top job at Westpac.

McEwan, a New Zealander who recently lost the two-candidate race to take the helm of CBA, is due to join RBS over the summer. Hartzer, whose resignation had already been announced, leaves next month.

The role is a key appointment for RBS, which also owns NatWest on the high street.

Stephen Hester, the RBS chief executive, said: “We have more to do to fulfil the full potential of the retail business in a changing banking market.”

McEwan will not be on the main board of RBS but will sit on Hester’s executive committee and is likely to emerge as one of the bank’s eight highest-paid bankers under the new disclosure requirements introduced by the government to expose pay policies outside the boardroom.

At CBA Ross, who is 54 and married with two children, had a salary of A$1.25m (£780,000) and a cash bonus of A$647,657. Another A$2.4m was vested during 2011 from previous long-term reward schemes.

Ian Narev, who won the internal race for the top job at CAB, said a replacement for McEwan would be found in due course. “For the last five years he has been a highly valued member of the group’s executive committee,” said Narev. “He leaves with our sincere appreciation and best wishes.”

Aviva chairman aims to repair damage after remuneration report rebellion

John McFarlane, who officially becomes chairman next month, must decide whether to retain chief executive Andrew Moss

John McFarlane, the incoming chairman of Aviva, is expected to embark on a series of meetings with disgruntled investors as he leads the attempts to restore relations between the insurer and the City after the humiliating defeat of its remuneration report last week.

McFarlane, the former boss of Australia and New Zealand Banking Group (ANZ), must decide whether or not to retain Aviva’s embattled chief executive Andrew Moss. McFarlane officially becomes chairman next month but is expected to move quickly to begin trying to repair the insurer’s reputation.

Moss was on the backfoot at the AGM on Thursday, where 60% of investors failed to back the remuneration report. He admitted he was “as frustrated about [the share price] as anybody”. It has slumped 60% since he became chief executive in July 2007.

Moss and the outgoing chairman, Lord Sharman, were accused of destroying shareholder value and urged to step down at the annual meeting.

A City analyst said: “There is concern over leadership. If that was resolved, that might help the situation.”

The vote against the pay report indicates that investors are running out of patience with the management team after years of indecision and confusing strategies.

Moss will have to explain the insurer’s strategy to shareholders at an investor day on 24 May, in particular the rationale behind its move to strip out the regional layer of its management structure.

While the slimmer organisation was welcomed by the City, eyebrows were raised over Aviva’s decision to part company with its highly respected European chief, Igal Mayer. He lost out to Trevor Matthews, who joined from Friends Life last year to become Aviva’s UK head and was elevated to executive director of developed markets last month.

The restructuring reflects the company’s decision to focus on a core dozen countries, which was a major shift in strategy in November 2010. Two years ago, the insurer operated in 30 countries; now it is in 21.

In another U-turn, Aviva is believed to be considering a sale of its US operation.

Unlike other UK insurers, Aviva is heavily exposed to the European debt crisis. “The big issue is Italian sovereign debt and there is not a lot they can do about that,” said Barrie Cornes, insurance analyst at Panmure Gordon. He suggested boosting the capital position, and a sale of the US business. would be one way of achieving that. : “A change of chairman brings the benefit of a fresh pair of eyes looking at the business,” he said.

McFarlane was a high-profile figure in Australian banking circles in the runup to the banking crisis and is best known in the City for his tenure on the board of Royal Bank of Scotland.

Scottish-born, he joined the board on 1 October 2008 – just a fortnight before Fred “the Shred” Goodwin was ousted as chief executive and the bank bailed out – and was considered a potential candidate to chair the troubled operation at one point.

At Aviva’s shareholder meeting, McFarlane was asked about his role at RBS. “Hopefully I was helpful in the recovery of RBS and I’m certainly not guilty for its demise,” he said. “I was slightly instrumental in the change of the chief executive.”

While McFarlane ran ANZ for a decade, until September 2007, he had a varied career inside and outside of banking. He has also been a group executive director of Standard Chartered and was head of Citicorp/Citibank in the UK and Ireland.

His replacement at ANZ was 29-year-old HSBC veteran Michael Smith, who was lured to Australia’s third-biggest bank with a £3.8m signing-on fee, sparking some criticism that McFarlane had failed to groom an internal successor. Having quit ANZ before the banking crisis took hold, McFarlane left with his reputation largely intact.

RBS reports £1.4bn loss but hails ‘recovery milestones’

Bailed out bank has nearly paid back billions it borrowed from Bank of England – although taxpayer is still sitting on £21bn loss

Royal Bank of Scotland hailed the achievement of “important recovery milestones” on Friday even as it reported a loss of £1.4bn in the first quarter.

The bank, 83% owned by the taxpayer, signalled that it was ready to resume payments to bond holders – which were banned under the terms of EU state aid rules until the end of the last month – and that it had nearly paid back cash borrowed to keep it afloat during the banking crisis.

However, the bailed out bank took an extra £125m charge for compensating customers missold payment protection insurance.

The £1.4bn loss compares with £116m a year ago – although it was largely caused by a £2.5bn change in the value of the bank’s debt. Operating profits, which chief executive Stephen Hester prefers to focus on, were £1.2bn, largely unchanged on the same three months last year.

“We are happy with progress in the first quarter though the economic and regulatory backdrop remains tough. RBS continues, markedly, to regain strength and resilience. Our focus is on improving the future for customers and our business whilst ensuring that the bank’s past issues are dealt with,” Hester said.

The taxpayer, though, is sitting on a £21bn loss on its stake in the bank.

Hester described the move to resume payments to bond holders as “important recovery milestones” and pointed out that the bank would next week pay off the last of the funds it borrowed from the Bank of England during the crisis. Hester said the government made a £1bn profit from the loans.

“With growth prospects muted in the major economies in which the group operates, and with fragilities persisting in European financial markets, the focus has remained on improving balance sheet strength and a strong liquidity position,” Hester said.

The loan to deposit ratio – which shows how many savings can be used to supporting lending – has now reached 106% compared with more than 150% during the crisis.

The bank has also paid £2.5bn for the cost of the insurance it receives for its most troubled assets through the asset protection scheme.

As with its rivals, RBS continues to be hit by charges to compensate customers for PPI misselling and it has now set aside £1.2bn for claims. Some £501m had been paid out by 31 March.

External auditor: ‘Nobody at a bank can have a complete overview any more’ | Joris Luyendijk

Are banks’ accounts too complex to oversee? An external auditor talks to Joris Luyendijk about understanding true risks

• This monologue is part of a series in which people across the financial sector speak about their working lives

We are meeting for lunch in a restaurant near Canary Wharf. He is well dressed in a non-flashy kind of way and delivers his verdicts and observations in a staccato and confident voice, as if the world’s absurdist aspects are actually quite amusing.

“The hardest thing to explain about this job to outsiders? I wouldn’t know. As soon as I mention to people that I’m an accountant, the conversation ends.

“The biggest shock if readers saw what I see? I suppose the numbers, the sheer size of the data streams. You lose perspective. I lose perspective. Sometimes when all the figures on a page are in millions, I catch myself assuming that another figure on that page is also in millions, when it’s actually in billions …

“Think of when an exam is graded, and a random sample gets passed on for inspection? Accountants, or external auditors, are those inspectors. Except here it’s the annual financial statements of a bank or financial firm.

“We come in for anywhere between two weeks for smaller companies to all year for a large multinational, and we talk to people who are busy, or pretend to be busy. They don’t want us to find anything, as this will mean more work, and will make them look incompetent to their boss. Some get stressful but most are co-operative.

“We need to find stuff that we can take into the meeting with the client, so we can say, look, this is what we found, can you explain that? How do we justify our fee if we dig up absolutely nothing? At the other end of the spectrum there is the opposite dynamic. The more we find, the more extra work we need to do. That pushes up our cost to the client, or eats into our revenues. You could argue that on an individual basis accountants are incentivised not to find something.

“We check by sampling. This is worth emphasising. Operations of large firms have become so huge and complex, and none more so than those in this sector. A client may process transactions worth a trillion pounds a day. There’s no way you are going to check everything. When we find an error we extrapolate it; suppose this level of irregularity was found across the company, how much would that affect the numbers quoted in annual report? If it is below our levels of ‘materiality’ then we don’t worry about it.

“Materiality is a key concept. In essence it means how big does a number have to be to become important to the users of the financial statements? Say a bank turns over £10bn per annum. We might go in and say that 2% of that is our materiality so if the errors we find add up to less than that (£200m) the accounts can pass as accurate. There is another number we come up with which is for amounts below which we’re just not interested. This can be as high as £10m.

“Nobody at a major bank can have a complete overview any more. It’s simply become too large. A lot of the people I talk to don’t really understand where they fit into the bigger picture. By the way, a lot of non-financial companies are like this, too. People in an office context have this security zone, they know where the boundaries are, and they stay within them, do what they have to do and that’s it.

“Some are self-deluded, telling themselves they understand it all when they don’t. Others will hide their confusion. Basically I have never met anyone so far who owned up to any worries about the operations, everything is fine until you find a problem.

“But when I ask questions, often they don’t have answers. Or rather, they have answers for the area they are responsible for. Then there’s a manager who is supposed to oversee all this. But the manager doesn’t have an on-the-ground view, he works with abstractions. That manager reports to a higher manager who is even further away from it all, and so on.

“Generally I find that the simpler the question you ask people in banks and financial firms, the more lost they are. For instance, why did you make less profit than last year? Accountants need to come up with a narrative, a storyline why profits went up in one department, down in another. On that level of analysis, investment bankers have simply no clue, most of the time. They can give me the numbers I need, they can answer my question about differences between one figure in a report and another. But where the economy is going and why they won or lost money … It’s always a similar answer: profits went down due to something external in the market, profits went up due to their competence, this trade, that trade etc.

“There’s a reason this is important for us. Accountants look at the value of the company. But there’s also something called ‘going concern’; do we believe that a year from now this company will still exist? For that, we look at the reliability of projections for cash flow, at how much risk the bank is currently running. That’s very hard to do, to say the least, a negative report would kill a company off.

“When something has gone wrong, for instance with RBS, people say: where are the auditors? The thing is, on a macro level there are so many ‘unknown unknowns’. I find sometimes the people in financial firms and banks themselves can’t really determine the risk they’re taking. Every day they look at what they own, their positions on the market and how much loss these might cause, and they calculate the risks of that. But it’s very hard to work out these risks. Sure, you can model for a whole number of risks, foreign exchange fluctuations, credit risk – someone defaulting etc. But at the macro level, when the whole economy goes down, or banks can’t get funding – you can’t really protect yourself against that. And everything has become so interconnected.

“Compare understanding a bank’s true risks to understanding a person’s true nature. You can run all sorts of psychological tests and these will throw up patterns; if this situation happens, then they will do this. If that situation happens then … But it’s like the real world, it’s impossible to get to the bottom of it all, there are just too many factors. Say every day I have a chicken sandwich for lunch and the next day bacon and continue this for a year. You may be able to model this, form expectations and get it right a large proportion of the time, but what happens when I turn vegan, or develop a gluten intolerance? That’s a game changer, all of a sudden I’m eating couscous salad and your old models which worked perfectly for several years are obsolete.

“How this job works, in very practical terms. We come in and decide what areas we are going to focus on. Then I get a lot of numbers on my screen, which I try to connect to something physical. I need to see the contracts that those numbers derive from. Many contracts are about transactions the bank is going to do in the future. We need to know what is in those contracts, no nasty exception clauses or anything. Basically we put a number to all obligations the bank has, determine the value of everything it owns, and say: on 31 December this company was worth …

“Now by the time the report comes out we will be in a completely different situation because months have passed. Say the bank holds many futures on currency swaps. Then tomorrow the euro goes up or down and the value of anything in euros has changed enormously.

“I’d have a number in one system and another number in another system; and these two should be the same. But they’re not. So I go to the person responsible and we work out the reason. He may say, you didn’t add this up, or: this is in dollars, that is in pounds. One system may work with one data set for, say, interest rates over the past 360 days, and another system with interest rates over the past 365 days – I am giving simplified examples.

“The truth is that banks don’t have one system designed to deal with all their activities. They have lots of different systems on top of one another. Often when a new financial product is designed, they add a patch. Then front-, mid- and back-office may have different systems. Different branches of the bank in different countries may have different systems. What happens is that those operating the systems will have ‘get-arounds’, solutions for when one system cannot process a particular product or activity. You will not be surprised to hear that there are systems running those systems, and so on.

“I don’t understand many of these products myself; we have a special team of financial products specialists, who actually understand these instruments. We have a special team of IT specialists, who actually understand the systems and how they interact … If you are a boots factory, you have different products but they’re all the same in a fundamental way, they’re boots. Banks have such diverse revenue streams, and they work with products that behave in markets in completely different ways, that are fundamentally different from one another. As a CEO you cannot understand every single algorithm your bank uses, every product they trade. CEOs get someone telling them: don’t worry, it’s under control.

“What many people fail to realise: not only do banks have these products on their books. Other companies have bought them, too. Now is some power company in, say, South America really going to understand the complex derivative it bought, and with it the risks they have taken on? That’s not their expertise.

“Initially derivatives are taken on by companies to lower their risk, which derivatives are perfectly able to do. However, derivatives bring their own risks, if a company gets a decimal place in the wrong place on calculations, or their systems valuation isn’t entirely accurate on a certain set of derivatives then they could have lost billions without even knowing it.

“I am still training to be a chartered accountant and I knew very little about finance before this. One thing that surprised me was just how many controls there are around the banks’ systems. There is always someone checking if everything adds up. They have internal auditors, they have a control department … And still there are errors and fraud. Some instances of ‘rogue trading’ [traders hiding losses in the system] reach the press, but there’s more that doesn’t get out.

“I have been in retail banks, clearing houses, brokers, hedge funds, commodity traders … There is no real difference between the people, I find. Compared with other industries people in finance look a bit smarter, ha ha, because they get paid a bit more. The stereotypes of white-collar shirts and pin-striped suits … I presumed there to be much more like that. I don’t believe people actually work such long hours as they claim on your blog. They like to show off how important they are and working long hours must be a part of that. There’s no busier time around Canary Wharf, or Bank station [both home to a number of major banks] than around 6pm. People are going home! Stay on till 9pm and there’s no one there, relatively speaking. We have had to stay late a few times in one of those big banks. At 10.30 I wouldn’t see anybody else in the building. I am sure people make long hours. But it’s not the majority of the people, nor the majority of the time.

“As external auditors we get to see the payroll reports. That’s one of the best parts, seeing what everyone in that company is getting. Of course we are quite careful not to reveal anything to outsiders. It’s striking how people seem to make quite a lot more in jobs that are generic in nature. If you are in HR you are doing the same work as in any other industry, yet you make 20, 30% more, plus a 10k bonus. Not every year but often enough.

“I would go over these reports and think, wow, that guy makes 80k. Well, he is not that smart, I can easily do what he does … The money is a pull factor, to go into finance, why wouldn’t it be? If you are offered two identical jobs and one pays 20% extra, which are you going to choose? There are firms that I wouldn’t want to work for in the financial industry, but that would be the same in any industry; advertising, manufacturing, energy, pharmaceuticals …

“Still, I think I’d prefer to work in an industry that produces something more tangible. I would want to be in a small, relaxed company where you can get out in time. Some time ago I was in this company that had only a dozen people working there. They would have lunch together every day. That was great.

“In a way bankers are Marx’s dream, it’s the workers getting the fruits of their labours. It’s funny that the left is usually angry at shareholders, for taking money out of companies and thereby bringing down workers’ salaries. Yet with the banks they want shareholders to press the banks to do exactly that, and curb pay.

“I don’t know. They say that with day-to-day contact you take on the world view of those you surround yourself with, their norms, fashions, the way they talk … Maybe this is why I am beginning to sound like an apologist. I think of myself as quite leftist, though.

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RBS boss Stephen Hester hits back at the ‘hostile commentariat’

Speaking at the Manchester Business School, Hester said he had ‘underestimated how intense, critical and long lasting’ the spotlight would be on the bailed-out bank

Stephen Hester, chief executive of Royal Bank of Scotland, said it was “uncomfortable” to work at the bailed-out bank, and suggested the government’s 82% stake in the bank was slowing down its recovery.

Hester also hit back at the “commentariat” of politicians, media and commentators whose outcry forced him to waive his near £1m annual bonus, saying his motivation for staying on at RBS was to “prove the critics wrong”.

“No company has had a greater kicking or is subject to greater hostility from the commentariat … It is uncomfortable to work at RBS. One of the biggest rewards of returning the business to health will be the richly deserved sense of respect and accomplishment it can restore among staff.”

Speaking at the Manchester Business School, Hester said he had “underestimated how intense, critical and long lasting” the spotlight would be on the bailed-out bank and implied that the £45bn of taxpayer cash poured into the bank to save it from collapse was now hindering its return to financial health.: “Governments are not good long term owners of complex international businesses. The ownership can cause political controversy of itself, and create pressures that hinder the progress of the subject company.”

There were two years of “heavy lifting, significant clean up costs and vulnerability to outside events” left at RBS, he said. Hester is three years into a five year recovery plan and said his belief that the company can be turned around “has been tested but remains intact”. He added that the day when RBS can resume paying shareholder dividends and drive up its share price was “steadily approaching”.

In a speech designed to position RBS as integral to British community life, he said bankers were not “masters of the universe” – a reference to a phrase in Tom Wolfe’s novel Bonfire of the Vanities which became much quoted during the credit crunch – but “servants of our customers”.

Just as RBS became a “poster child” for banking excess during the boom years, Hester said the day when the government can sell its shares in the company will be a symbol of the UK’s economic recovery.

Corporate finance banker: ‘Praise is the biggest motivator for me, not money’ | Joris Luyendijk

Joris Luyendijk talks to a bank vice-president about job insecurity, salary competition and the importance of relationships

• This monologue is part of a series in which people across the financial sector speak about their working lives

We are meeting one stone-cold February morning for a coffee. He works as a vice-president in corporate finance for a bulge-bracket bank. In his early 30s, a tall man with a modest demeanour and a suit that looks expensive without being flashy, he orders a double espresso.

“There’s clearly something structurally wrong in our economy and system. Twenty years ago the CEO would make something like 40 times as much as the lowest employee. Now it’s 400 times. That can’t be right. But sometimes I feel bankers take all the flack for a broader phenomenon. Most, if not all FTSE-100 companies have some serious pay discrepancies, yet public indignation seems cornered on the banks. Because we were bailed out? Well, my bank wasn’t. Banks have a lot to answer for, but they are far from being the sole reason for the current crisis.

“So many people seem to automatically assume all bankers earn a million a year. We do not. There’s a lot of confusion.

“This is a well-paid profession, absolutely. But times are tough, and pay is much lower than it was. Bonuses lead to endless gossiping, of course. ‘I heard so and so got so much’, ‘How much do you think so and so got?’ What happens is they rank people across the departments in the bank, from top to middle to bottom, and in theory then pay according to the rankings. Beyond that it becomes a bit more murky, you never know exactly how things get calculated. By the way, they don’t call it a bonus. It’s, let me see, ‘performance-related pay’.

“The job security is not great, to put it mildly. This is high-risk, high-reward work. You can just get a phone call and be told to clean out your desk.

“I think you could argue that investment banks are not always very well managed. What makes a good banker is not what makes a good manager. As soon as things are going well, they start hiring like crazy. Then there’s a bit of a downturn and they make all these people redundant again, paying large severance packages. You end up with organisations that are slightly short-sighted, with little continuity or institutional memory.

“In my department, the corporate finance teams are the interface between a corporation (the client) and the bank. When the client needs any of the financial services the bank offers, they come through our team and we will manage the relationship. Banks tend to divide up their clients by sector; pharmaceuticals, utilities, consumer, telecoms and so on. I am in one of these teams.

“Clients may need to restructure their debt, to issue shares, they may want to buy or sell a company. They may need a derivative, for protection against currency or interest rate swings. People talk about the large fees charged by banks, but we may advise and produce work for a client for years without making any money. It is only when actual deals are done that we charge a fee and recoup all those costs. The world of investment banking is very competitive, and there are a large number banks aggressively pitching for deals.

“League tables are very important when pitching for business. These rank banks for their market share in, say, M&A [mergers and acquisitions] or issuing equity. If a bank wants to climb up the league tables, it might pitch very low fees simply to increase market share.

“Clients attach enormous importance to track record. They might ask: ‘So tell me about the last IPO [taking a company to the stock market] you did in country X?’. When we close a big deal, we have trophies called ‘tombstones‘. It might read ‘Sainsbury’s plc GBP5bn rights issue’.

“Corporate finance is a great area. You work on big deals all the time and meet lots of interesting people. It’s also great for keeping doors open for later steps in a career, for example you could then move into private equity, or work for a corporate, or set up your own business … You can leave your options open. Then again, in the current climate everyone is primarily scared for their jobs.

“Yes, you could say that in my career I have now entered puberty, with the rank of vice-president. Director is like adulthood. In the major banks you start as an analyst for three years, then you become associate for another three. Next is vice-president. As you climb your work independence goes up. I get more control over the work I do, and I delegate much more. It gets more interesting as you move up.

“I don’t work till 3am every night, only occasionally. But there’s little room for social life during the week. Even senior people have a pretty antisocial lifestyle. They may not sit in the office till midnight but they may have to get up at 4am to catch a flight to somewhere in Europe, fly back on the same day and sometimes on to another flight. You have heard of the ‘red-eye’? That’s the flight out of New York that arrives in the morning.

“Another thing about bankers: they are always on call. When the client wants something, the bank has to deliver, even if that means sacrificing whatever previous plans the bankers had. I am sitting here now, but when I return to the office I may find an email from a senior asking for a presentation by next week. Your whole week can change like that. Seniors just drop that on you. It may be 23 December and we get a call from a client asking for a presentation by 2 January. Well, that client knows that he has just destroyed three bankers’ Christmas holidays as they will have to stay in the office to work.

“The cost reductions these days go deep. No business class obviously, other than for long-haul flights, and if there’s a cheap flight at 6am and a more expensive one at 7am, you’re told to take the 6am one, even if it means waking up at 4am.

“I don’t think the next few years will be much better. The glory days are over. Banking has become a dirty word, and it has all become so political. Just look at Hester at RBS. These days I am quite cagey about where I work, saying ‘finance’ in the hope that people will think ‘boring’ and leave it alone.

“If you are an internet start-up you have very low barriers to entry. A couple of smart people and a computer. Banking is very different. You need a big balance sheet to do a lot of the business we do for clients, and a huge amount of back-office staff, systems, and so on. For example, with equity raising – issuing new shares in a company – you of course need the expertise and the experience to advise the company on the markets, but there is also a huge network of people and systems required to do the deal: sales teams to interest investors in the new shares, traders to trade them, huge IT operations.

“I’d say the only area in finance with low barriers to entry is advisory, such as mergers and acquisitions. This is why you see so-called boutiques being set up by bankers striking out on their own. They bring the experience and expertise, then all they need is a team of analysts to crunch the numbers plus a few computers in an office, and there is no real need for capital or a balance sheet.

“When looking at a transaction, banks have lots of committees, like risk committees, to approve the deal. When we are working on a lending deal with a client, the committee will look at two things: first, if we lend money to this corporation, what will be our rate of return on the money we are lending them? As some people in the industry say: ‘What’s the wallet?’ I hate that expression, frankly. Second, what is the risk or the probability of us not getting our money back?

“When we really believe in the deal we will try to push it as best as we can. Sit down and do extensive risk analyses, run scenarios. The committee will ask lots of tough questions, they may say: in their financial model your client assumes a growth of revenues of 1%, based on a view that the UK economy as a whole will grow. How do things look if economic growth is flat? Then we need to prove that even in that negative scenario, the company will still pay its debts.

“I am simplifying here of course, to give you an idea. It’s all about risk, that’s what banking is: creating risk, and protecting against that risk. The margin a bank charges on a deal is a function of the risk that the bank thinks it runs.

“There are banks that sell all the loans they make to a client on to other investors. That’s called ‘de-risking’ or syndication. Other banks keep some loans on their books, as an investment. These days companies and corporations increasingly expect us to keep some loans we write for them on our books. As an expression of commitment.

“Beginners’ mistakes in corporate finance … You need to be aware of your internal network. Your success in the bank is determined in great measure by the views other people in the bank have of you. You need juniors to say positive things such as ‘he always takes time to teach me things’. And seniors need to talk about you as someone they can rely on.

“Banks are huge organisations. It really helps when you know who to call for what, and if this person is inclined to help you. You need to invest in relationships internally.

“Perception is so important. People say that in presentations or speeches over 70% or so of an audience’s focus is on how speakers look, not on what they say. So I must stand there looking confident, with good hand movements and the right body language. The other guy from a different bank pitching for business may have something better to say but if he looks all shaky and unimpressive, the chances are clients will go with me. That’s just human nature.

“‘Who you know’ is no longer so important to get into in finance. In the old days your parents’ connections would get you a job in the City. Today, connections might get you a job interview at best. Still very nice but if you don’t do well, there’s no job. It’s become very meritocratic; skills and talent trump background.

“My income? Well, here’s a cultural sensitivity for you. English people are enormously uncomfortable talking about money. On my way here I caught myself going over all the ways I could formulate it. Do you phrase it as ‘close to’ or as ‘a little higher or lower than … ‘ Well, let’s say I have a six-figure salary and a six-figure bonus. Relative to my peers in some other banks I am possibly underpaid, actually.

“Still, it is a lot of money, I am totally cognisant of that. I do pay eye-watering amounts of taxes, I might add. When I look back at my early days in my career, I wonder how the hell did I survive on the starting salary I did, it was a lot lower than new graduates get today, maybe around £25k. I had no car back then. A cheap apartment, basic holidays.

“It would definitely be hard to drop down in income. I do think about switching jobs, and if the money in banking were severely curtailed, a lot of others might too. Were I to have kids, that would be a moment to step back and think about the sacrifices you have to make for the job.

“The thing is, money is not the biggest motivator for me. It’s the pleasure and excitement of the job. Yes, on bonus day I may get excited what the number in the envelope is going to be, although not so much these days. But after a day or two, I will have kind of forgotten all about it. The biggest motivator is praise. Praise from someone senior who has seen I’ve done a good job. That’s such a strong boost.

“I am probably on the right-hand-side of the political spectrum, especially relative to most of your readers. My sense is that the west has become lazy. Many people here seem to have to believe that the state owes them something. If you look at people in India and China, they have this hunger to succeed. That is lost in the west.”

RBS boss John Hourican makes £4.76m from share sale

Loss-making bank states in annual report that John Hourican got pay package of £7.5m last year despite thousands of job cuts

John Hourican, the investment banking boss of state-owned Royal Bank of Scotland, has pocketed £4.76m after exercising his share options.

RBS, which is 82%-owned by the taxpayer, after a state bailout during the 2008 credit crisis, said in a regulatory filing on Wednesday that Hourican had sold 17.6m shares at a price of about 27p a share.

The loss-making bank stated in its annual report last month that Hourican, who heads its GBM (Global Banking & Markets) division, which has had to slash thousands of jobs, got a pay package of around £7.5m last year.

RBS has cut 34,000 jobs since the 2008 crisis and its GBM division has sold off or shut down much of its equities operations in order to focus more on its stronger fixed income and foreign exchange businesses. Earlier this year, RBS chief executive Stephen Hester and chairman Philip Hampton had to give up their bonuses following a public outcry over the planned payments.

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David Cameron signals rethink over tax relief cap on philanthropy

At launch of Big Society Capital fund, prime minister pledges to listen to charities’ concerns over budget measure

David Cameron has signalled that George Osborne may revise his plans to impose a cap on tax relief for philanthropic gifts, amid warnings that the government is placing at risk vital donations to charities.

At the launch of a £600m fund to support grassroots social projects as part of his “big society” initiative, the prime minister pledged to listen to charities to ensure the budget did not have a harmful impact on donations.

Cameron acknowledged the concerns of charities after protests at the chancellor’s decision to crack down on people who make unlimited use of tax reliefs “year after year”.

Osborne said in the budget: “From next year anyone seeking to claim more than £50,000 of these reliefs in any one year will have a cap set at 25% of their income. We’ve capped benefits. Now it’s right to cap tax reliefs too.”

It is understood that Jeremy Hunt, the culture secretary, has led complaints within government that the Osborne plan will discourage philanthropic donations. The chancellor’s announcement, which was part of his plans to crack down on aggressive tax avoidance, appeared to contradict an announcement by Hunt last year about trying to create a US-style tradition of philanthropy in Britain.

Cameron said: “I know there are some concerns that the budget signals a weakening of our commitment to philanthropy. Let me make it clear. I want to see more, not less, philanthropic giving. That is at the heart of my vision of a bigger society where we rely more on each other and less on the state. That is why we are reducing inheritance tax for those estates that leave 10% or more to charity.

“We are bringing in a generous relief for those donating collections to the nation. We are working to streamline and simplify gift aid. But just as they do in the US, a country renowned for its philanthropy, we are capping tax reliefs because of the principle that everyone should pay some income tax. Even with the new cap individuals can still claim up to £50,000 in reliefs or a quarter of their income, whichever is the greater.

“However, as the chancellor said at the time of the budget, we want to engage with you and with everyone in the philanthropic sector to make sure this doesn’t have a harmful impact on philanthropic giving, particularly on those charities that can be dependent on large donations.”

The prime minister attempted to breathe fresh life into his flagging big society idea with the launch of the £600m fund. He announced that £400m from dormant bank accounts would be used to help finance the scheme, dubbed Big Society Capital. A further £200m will come from Britain’s four largest high street banks – Barclays, Lloyds, HSBC and RBS.

The fund will help local groups take control of their post office and provide capital for charities and voluntary groups bidding for government contracts. There will be a strong focus on helping the long-term unemployed back into work.

Cameron, who has faced criticism for failing to define the big society, hailed the scheme as one of the world’s most important social investment funds. He hopes it will show that the big society is more than just an election slogan.

Cameron declared on the eve of the Tory manifesto launch before the general election that he was inviting the British people to join his government as part of an open, big society. But many Tories said the idea, seen as the brainchild of Cameron’s policy guru Steve Hilton, was ill-defined and difficult to explain.

Ministers say it has taken two years to establish the fund, which will be run independently of the government by the former JP Morgan global head of research Nick O’Donohoe, and chaired by Sir Ronald Cohen, the Apax founder.

The European commission had to declare that the fund did not break its state aid rules. There were lengthy negotiations with the high street banks who made £200m of capital available under the terms of the Merlin deal with the government.

The prime minister said: “For years, the City has been associated with providing capital to help businesses to expand. Today, this is about supplying capital to help society expand. Just as finance from the City has been essential to help businesses grow and take on the world, so finance from the City is going to be essential to helping tackle our deepest social problems.”

A Tory source said: “The budget was explicit that we will proactively explore with philanthropists ways to ensure this new limit will not significantly impact upon charities that depend on large donations. The prime minister simply restated that position today. I don’t think it can be described as a ‘rethink’.”