Our last update revealed increased CEO bonuses and fairly robust payouts for long-term performance plans paying out for 2016 in the banking industry. This blog highlights expectations for 2017 performance as well as observed 2017 performance-to-date, which will have an impact on incentive payouts for the 2017 performance year. (For more details of our last analysis, see “Pay-for-performance update for banking industry: pay for 2016 performance,” Executive Pay Matters, June 27, 2017.)
As shown in Figure 1, growth expectations for the banking industry in 2017 compared with 2016 results are mixed. Revenue growth is expected to decline slightly following strong 2016 results, while earnings before interest and taxes (EBIT) and earnings per share (EPS) growth are expected to increase slightly. Return on equity (ROE) is expected remain flat year-over-year.
Figure 1. Analysts’ growth expectations for 2017 in the banking industry
Figure 2 compares 2017 results-to-date (first half) against the same period in 2016. Overall, the scorecard shows improving growth results (net revenue and EPS). Balance sheet returns and financial soundness are holding fairly steady. The price/earnings ratio has increased, and shareholder returns are healthy, albeit slightly below the prior period.
Figure 2. First half financial scorecard for the banking industry
Overall, the banking industry had a relatively strong first half to 2017. Credit quality remains strong in the industry with low levels of non-performing loans. The interest rate spread has also widened slightly in recent months due to a gradual tightening of monetary policy by the FED, generating revenue benefits by way of the spread earned between deposits and loans. Revenues in private banking and asset management have remained fairly resilient, while in the investment banking space, M&A activity has picked up and activity in the markets businesses is fairly strong to date. Additionally, banks continue to keep a laser-like focus on cost management in the current environment as they seek to optimize their compensation and non-compensation expense spending for the best return.
With the completion of the presidential administrations first year fast approaching, indications are that growth prospects arising from a more relaxed regulatory stance are already being factored into expectations as well as stock prices. The second half of 2017 performance will prove pivotal in terms of full-year results as banks look to continue to build on first-half year momentum. For a look at the 2017 expectations and first six month results in the broader S&P 1500, see “Pay-for-performance update for the S&P 1500: A strong first half”, Executive Pay Matters, October 5, 2017.
Looking ahead, current year performance also has implications for 2018 incentives. In our experience, goals tend to flex in strong and weak years in order to manage the probability of achieving target. Willis Towers Watson has been helping companies calibrate incentive plans goals using predictive analytics, namely with our proprietary predictive performance model (PPM). To learn more about our model, follow the link here.
Daniel Potter is a senior executive compensation analyst in the New York office. Marko Piedmont is an executive compensation analyst in the company’s Stamford, Connecticut office. Arpha Suwansatisakorn is a compensation analyst based in Willis Towers Watson’s New York office. Email firstname.lastname@example.org, email@example.com, firstname.lastname@example.org, or email@example.com.