Europe’s leading banks report dismal profits
LEADING European banks reported dismal profits yesterday, blaming everything from the debt crisis and Spain’s property market crash to Facebook’s disastrous stock market debut.
Within the space of an hour, UBS of Switzerland, Germany’s Deutsche Bank, BBVA of Spain and Austria’s Erste Bank delivered the bad news on an industry already beset by investigations into a number of scandals.
Deutsche Bank announced it will axe 1,900 jobs under a plan to cut costs by ¤3bn and streamline its business. New co-CEO Anshu Jain said expectations on profitability had moved “closer to our grim scenario”.
Banks are suffering from the eurozone crisis that politicians are struggling to solve, a transatlantic investigation into interest raterigging and regulators tightening the screws on the industry.
“This is the longest tunnel I have ever been in and there’s no sign of light at the end of it,” said an investor who is a top 10 shareholder in the Royal Bank of Scotland and has other bank shares.
The sharp drop in profits cast doubt on whether formerly blue riband banking sectors will ever recover the levels of profitability before the crash of 2008-09.
“The question is whether we are entering a new paradigm, not only in investment banking but in wealth management and other product areas that are going to see lower returns,” said Chris Wheeler, an analyst at Mediobanca. “We are not going to return to precrisis levels even in wealth management; the question is how much lower will it be?”
UBS, which had recovered well after being bailed out by the Swiss state, said second-quarter profit more than halved to Sf425m as its investment bank made a loss.
The bank took a Sf349m ($356m) loss on its role as a market maker on social networking site Facebook’s flotation in May.
UBS blamed Nasdaq’s “gross mishandling” of the offer and plans to take action against it. Facebook shares have shed about 40% of their value since the company’s ill-starred debut.
UBS CEO Sergio Ermotti warned investors against expecting any rapid recovery. “A return of confidence can only happen when clients believe there is a clear and lasting resolution to today’s economic and political challenges,” he said.
Weak economic growth or outright recession across Europe has hit the banking industry, not least in Spain where the government has agreed to take up to ¤100bn in European Union (EU) aid to save its most troubled lenders.
A property market crash and a recession have hurt even BBVA, Spain’s second-biggest bank, which is not expected to need EU help. Its first-half profit slumped by a third as it set aside cash to cover losses on its toxic real estate loans, as all the country’s banks have been ordered to do.
Deutsche Bank also saw a drop in trading at its investment bank, where profit plunged 63%, underscoring the problems facing its new leaders. In one of his first acts as co-CEO, Mr Jain is cutting numbers in what is nicknamed “Anshu’s Army”. Most of the cuts will be outside Germany.
Costs at the investment bank represented 87% of income, and return on equity was just 5%, well below its cost of capital
In Austria, Erste Bank cut its profit outlook for this year for the second time in three months.
By late afternoon, UBS shares were down 6.2%, Erste shed 5.6%, Deutsche Bank 0.3% and BBVA was flat. The European bank index fell 2.75%. Reuters