LONDON Unhappy investors warned British banks to brace for a sell-off in their shares unless there is real action to stamp out excessive pay and reverse shrinking rewards for shareholders.
After years watching boardroom bonus and salary hikes outpace growth in their returns, investors say they are growing tired of unanswered calls for change, with some tempted to skip another fruitless war of words to vote with their feet instead.
"It has not been a very rewarding experience to be a bank shareholder for some time ... and it does not feel like that is going to change too quickly either," one equities manager holding top 25 positions in Barclays (BARC.L), HSBC (HSBA.L), Lloyds (LLOY.L) and RBS (RBS.L).
The investor said his firm intended to vote against all remuneration reports of all those lenders at upcoming annual meetings.
Mounting anger over paltry returns was made clear with a warning shot from shareholders in U.S. lender Citigroup, who this week voted down its executive pay plan.
And Barclays on Thursday made a last-ditch attempt to appease its critics by tweaking conditions on chief executive Bob Diamond's bonus. It has met investors amid talk of a revolt, and said the change reflected the "strength of opinion expressed by some shareholders".
Barclays' AGM on April 27 will be followed by HSBC, Lloyds, RBS and Standard Chartered (STAN.L) in May.
With even the stronger banks struggling to deliver returns above the cost of capital against a tougher regulatory and economic backdrop, costs need to be tackled more aggressively, investors say.
"All banks have got further to go ... Remuneration levels are unsustainable given the changed regulatory levels ahead of us. That is irrefutable," said Robert Talbut, chief investment officer of Royal London Asset Management and chair of the Association of British Insurers investment committee.
The ABI has roughly 440 members who own about a fifth of the British stock market.
Banks are attempting to cut costs, exit unprofitable areas and become leaner -- especially in investment banking -- to adapt to regulatory change and the need to hold more capital.
But several investors said without a bigger reduction in their costs, the returns on offer for shareholders are not enough to keep many of them invested.
"With this shifting business model, we believe that remuneration in banks should also adjust accordingly, in a way that reflects lower levels of profitability and volatility," said George Dallas, director of corporate governance at F&C.
Britain's banks are struggling to get near their return on equity above 13 percent -- considered a realistic target in the new environment -- leaving valuations depressed.
"There's still a febrile debate on whether we are paying for performance or overpaying for the performance that has been delivered," the ABI's Talbut said.
Barclays' Diamond will take home about 17 million pounds in salary, bonus and share awards for last year. The bank has attempted to reassure investors that his lucrative deals will shrink from this year, as long-term awards granted when he ran the investment bank come to an end.
Shareholder advisory service Pirc said investors should reject Barclays's pay plan, and IVIS, the ABI's advisory service, said it had some concerns too.
Asset managers at Standard Life, Aviva, SWIP and Fidelity are considering voting against Barclays' pay plans, according to several media reports.
In recent years shareholders have shown some anger at pay awards but at levels out of kilter with public outrage.
At Lloyds, 8.1 percent voted against its remuneration at last year's AGM, and a further 10 percent withheld their vote. But after stripping out the large chunk of shares held by the government, about 40 percent of investors voted against the plan or abstained.
Some 22 percent of HSBC's investors voted against or withheld their vote on its pay, broadly in line with the 21 percent at Standard Chartered.
At Barclays, 11 percent of investors voted down or withheld their vote, and at RBS it was less than 1 percent, or about 7 percent excluding the government's stake.
The average vote against remuneration for all companies was 6 percent in 2011 and on average another 3 percent abstained, according to Pirc.
Hans Hirt, head of corporate governance at Hermes Equity Ownership Services, said the backlash could be stronger this year.
"Things have changed, the environment has changed and the issues being discussed have changed and I think this will be reflected in a more critical exercise of voting rights at forthcoming AGMs."
(Editing by David Cowell)