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Deep Cost Cuts Loom At Europe's Investment Banks

26 July, 2011

European investment banks are expected to reveal deep cost cuts amid declining trading revenues and concern over their exposure to the region’s debt-laden economies.

Employees at UBS are preparing for up to 5,000 job cuts across the group on Tuesday, when the Swiss bank, and Germany’s Deutsche Bank, kick off the quarterly reporting season.

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Credit Suisse and Barclays are also paring staff as banks slash expenses to meet ambitious profit targets.

Fixed income trading revenues, the profit engine for most investment banks since the financial crisis, fell sharply at the biggest US banks in the second quarter, compared with the first three months of the year.

Analysts expect European investment banks to report similar declines as clients continue to scale back risk exposure in an uncertain macroeconomic climate.

Credit Suisse is expected to suffer the steepest percentage fall in revenues from its fixed-income, currency and commodities division of the big four European investment banks, with Morgan Stanley forecasting a 41 per cent quarter-on-quarter decline.

A significant rise in mergers and acquisitions activity and underwriting of debt and equity issues will partially plug the gap for European banks, analysts said. Globally, investment banking fees were up 23 per cent year-on-year in the first half, and 26 per cent in Europe, according to Thomson Reuters.

Overall, investment banking revenues at Deutsche Bank, UBS and Credit Suisse will be down by an average of 25 per cent from the seasonally strong first quarter, while net profits are expected to have tumbled by an average of 49 per cent over the same period, according to analysts at Citigroup.

In the UK, investment banking revenues at Barclays and Royal Bank of Scotland Group revenues are expected to be down about 30 per cent from the first six months of 2010, with pre-tax profits falling a similar amount on average.

Groups that have adopted more cautious post-crisis trading strategies are likely to have been hit hardest by the sluggish market, analysts said. Goldman Sachs, for example, stunned Wall Street last week with its worst fixed-income trading performance in years after taking on less risk – revenues in its FICC business plunged 63 per cent quarter on quarter.

In Europe, Credit Suisse is among the institutions that have reduced risk in pursuit of less volatile earnings in investment banking.

Banks are already shedding staff in response to less favourable markets. UBS’s cost cutting is expected to target between 5 and 7 per cent of staff across the group, including its big wealth management arm.

Analysts also expect many European banks to reveal significant writedowns on their Greek sovereign debt holdings.

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Deep Cost Cuts Loom At Europe's Investment Banks

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