Job Cuts Loom at European Banks as Economy Pinches Fees

Job Cuts Loom at European Banks as Economy Pinches Fees

European banks, which eliminated more than 140,000 jobs in two years, are poised to keep shrinking. Lenders in the region probably will cut at least 5 percent of trading and advisory staff next year, according to a survey of three London-based investment-bank recruiters, and the reductions could reach 15 percent, two of them said. That would be twice the 7 percent shrinkage across the industry since 2011.European firms are lagging behind U.S. counterparts in meeting stricter limits on leverage, putting pressure on them to cut assets. At the same time, a stagnant economy is crimping fees from investment banking and merger advice, eroding returns. That may force banks to eliminate more jobs next year, dispose of whole businesses and surrender market share in fixed income.

“As European banks focus on leverage, they’re losing market share to U.S. firms,” said Philippe Bodereau, the London-based head of European credit research at Pacific Investment Management Co., the world’s largest fixed-income manager. “We’re seeing a lot of banks that are starting to cut balance sheets. Cost control will remain a big item.”

Banks in Europe with global securities businesses, including Deutsche Bank AG (DBK) and Barclays (BARC) Plc, posted a 13 percent drop in third-quarter investment-banking revenue, hurt by lower fixed-income trading, according to data compiled by Bloomberg. That exceeded a 9 percent decline at the largest U.S. firms.

Continued Cutting

European lenders continued cutting jobs in the quarter, with bigger year-on-year declines in front-office fixed-income and investment-banking employment than U.S. peers, according to Coalition, a London-based company that provides research on investment banks. Fixed-income headcount fell about 12 percent at European banks in the period compared with a 7 percent drop at U.S. firms, Coalition data show. Staff at advisory units fell 7 percent compared with 4 percent in the U.S.

About 3,000 front-office jobs probably will be eliminated in 2014 at the 10 largest global securities firms, and the cuts could exceed 6,000 across the industry, Matt Spick, a London-based analyst at Deutsche Bank, wrote in a note to clients Dec. 4. Banks may exit some fixed-income businesses and will need to improve productivity in equity sales and trading, Spick wrote. He didn’t provide a regional breakdown.

Deutsche Bank, Germany’s biggest lender, and London-based Barclays are among the firms most reliant on fixed-income trading. The FICC business, which ranges from government-bond trading to providing foreign-exchange services for corporate clients, contributed about 44 percent of investment-bank revenue in the third quarter at both firms. By comparison, about 29 percent of JPMorgan Chase & Co. (JPM)’s investment-bank revenue came from its FICC business, data compiled by Bloomberg show. Spokesmen for Barclays and Deutsche Bank declined to comment.

‘Very Challenging’

“Investment banking’s been very challenging, and the art is to adjust cost,” said Peter Braendle, a portfolio manager at Swisscanto Asset Management AG in Zurich, where he manages about 500 million Swiss francs ($550 million), including shares of Deutsche Bank and Barclays. “There’s still overcapacity and businesses that aren’t performing well. Profitability and capital requirements are a concern for European banks.”

After exiting its longest recession in the second quarter, the euro area remains economically fragile. The European Union last month trimmed its forecast for growth next year in countries that share the euro to 1.1 percent and raised its unemployment estimate to 12.2 percent.

Merger Fees

While mergers involving companies in Europe, the Middle East and Africa are headed for the best year since 2008, reaching about $950 billion so far in 2013, that’s still less half the record $2.3 trillion tally seen in 2007, data compiled by Bloomberg show.

In the 10 months through Oct. 31, investment-banking fees from mergers and initial public offerings in Western Europe rose 3 percent from the year-earlier period, trailing a 12 percent gain in the U.S., data compiled by New York-based consulting firm Freeman & Co. show. Fee income in Europe is almost 50 percent below the 2007 peak compared with a 17 percent decline posted by U.S. firms, according to Freeman.

“This downturn isn’t just cyclical,” Thierry Varene, head of BNP Paribas SA’s investment-banking business in Europe, said in an interview. “It’s unusually long.”

Fourth-quarter investment-banking revenue among six securities firms tracked by JPMorgan — Goldman Sachs Group Inc. (GS), Credit Suisse Group AG, UBS AG (UBSN), Deutsche Bank, Morgan Stanley (MS) and Barclays — probably will fall an average of 14 percent from the same period last year, Kian Abouhossein, a JPMorgan analyst in London, wrote in a note to clients on Nov. 26. Barclays, based in London, and France’s Societe Generale SA (GLE) may post the largest drops in fixed-income revenue, 37 percent and 33 percent respectively, he wrote.

Losing Share

The declines come as most European firms, including Frankfurt-based Deutsche Bank, Germany’s biggest lender, and BNP Paribas (BNP), France’s largest, lost market share in fixed-income trading in the third quarter, according to Huw van Steenis, a London-based analyst at Morgan Stanley.

Deutsche Bank and Zurich-based UBS are the only European firms among the top seven underwriters of stock sales in Europe this year, down from three last year, data compiled by Bloomberg show. Only one European bank, Barclays, is among the top five advisers on mergers involving companies in the region this year, compared with three last year.

Barclays, UBS

Three European banks — Deutsche Bank, Barclays and UBS — as well as Morgan Stanley and Bank of America Corp. (BAC) probably will post a return on equity below 7 percent this year, the average for the 10 securities firms tracked by Bloomberg Industries. Citigroup Inc. (C), Credit Suisse (CSGN), JPMorgan and Goldman Sachs probably will be above average.

Shares of Europe’s top securities businesses have lagged behind those of U.S. competitors, with the leading performer in Europe, Credit Suisse, rising 22 percent this year, data compiled by Bloomberg show. That trails gains of 63 percent by New York-based Morgan Stanley and 30 percent by JPMorgan.

Stagnating revenue coincides with regulators’ increasing focus on leverage, the latest effort to prevent a repeat of taxpayer-funded rescues. International and national rule makers are urging banks to hold more capital in relation to total assets, regardless of their riskiness.

The Basel Committee on Banking Supervision has recommended a minimum 3 percent ratio by 2018, while Britain wants the target introduced by 2014. UBS and Credit Suisse expect their leverage requirement to be about 4.2 percent by 2019 amid calls in Switzerland for the ratio to be as high as 10 percent. U.S. regulators including the Federal Reserve have proposed that the eight largest lenders hold as much as 6 percent of capital in relation to total assets.

Capital Shortfall

PricewaterhouseCoopers LLP said on Nov. 28 that European banks face a capital shortfall of about 280 billion euros ($381 billion) next year as they struggle to meet new requirements on leverage and may need to issue 180 billion euros in new equity.

Among the four European banks with the largest securities arms, Switzerland’s UBS and Credit Suisse and Britain’s Barclays fall short of local leverage targets, Mediobanca SpA wrote in a note to clients on Nov. 11. Only Deutsche Bank met its threshold of 3 percent, though that’s including capital that will be phased out in coming years, Mediobanca analysts wrote.

Deutsche Bank said in July it would shrink its balance sheet by 250 billion euros, or 16 percent, by 2015 to meet the stricter leverage standards.

‘Tough Decisions’

“Rising fixed costs stemming from compliance and needing to hold extra capital, combined with lower revenue, are an enormous challenge,” Morgan Stanley’s van Steenis said in an interview. “European banks, particularly the mid-tier players, will be forced to make tough decisions and pick their spot in the market.”

Banker dismissals in Europe may accelerate in fixed income and rates, and securities firms probably will review their global strategies to pull back from some countries or services, van Steenis said.

UBS Chief Executive Officer Sergio Ermotti, 53, last year decided to exit most debt trading, cut 10,000 jobs at the investment bank and focus on money-managing businesses. The bank said at the time that it would keep its advisory, equities, foreign exchange and precious-metals units, and would maintain facilitation capabilities in rates and credit.

‘New World’

The decline in fixed-income trading drew scrutiny from analysts and investors as banks reported third-quarter earnings.

“This is a new world,” Credit Suisse Chief Executive Officer Brady Dougan, 54, said on a call with analysts on Oct. 24. “We certainly have to be very focused on the impact” of central banks withdrawing liquidity from the market, he said.

Deutsche Bank co-CEO Anshu Jain voiced similar concerns on call on Oct. 29. The decline in client trading is “having an impact on industry profitability,” Jain, 50, said.

Two of France’s three largest banks made a choice about how to address profitability last month: Societe Generale said it would take sole ownership of broker Newedge Group, buying out Credit Agricole SA (ACA)’s 50 percent stake. Societe Generale said the deal supports its plans to grow in fixed income, while Credit Agricole is exiting all brokerage after pulling out of equities.

French banks “will have little choice but to push cost-cutting further,” Alain Branchey and Eric Dupont, analysts at Fitch Ratings, wrote in a Dec. 3 report. Corporate demand for investment-banking products will remain “subdued,” especially for the most complex, profitable products, they wrote.

“What we have in Europe is a constant agenda for change,” with “a lot of pruning going on” compared with U.S. banks, said Simon Morris, a partner at CMS Cameron McKenna LLP’s financial-services practice in London. “There are more controls, more conservatism and more caution, and calls for more money to be put up, yet firms are required to curtail the risk appetite that could generate the returns.”

To contact the reporters on this story: Elisa Martinuzzi in Milan at; Ambereen Choudhury in London at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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