Oct. 25 (Bloomberg) -- Deutsche Bank AG and UBS AG, the biggest banks in Germany and Switzerland, signaled more jobs may be at risk as the European sovereign debt crisis and global economic slowdown crimp investment-banking revenue.
Deutsche Bank Chief Financial Officer Stefan Krause said the Frankfurt-based lender will continue to adjust its “platform” if the environment persists after announcing 500 job cuts earlier this month. His UBS counterpart Tom Naratil said in an interview today that a reorganization of the investment bank may lead to lower headcount at the unit.
Europe’s biggest investment banks may have little choice but to accelerate asset and cost reductions amid worsening earnings prospects and demands for more capital. UBS in July abandoned its goal of doubling pretax profit by 2014 and Deutsche Bank scrapped its full-year profit target earlier this month as European leaders rush to tackle the Greece-led debt shock that threatens to tip the world into a recession.
“The outlooks were very cautious because if the sovereign debt crisis isn’t solved, the euro zone may slip into recession and that would hurt the investment banks,” said Michael Rohr, an analyst at Sylvia Quandt Research GmbH in Frankfurt, who has a “neutral” rating on the banks. “There’s definitely some fat left to burn, though UBS needs to cut costs more dramatically than Deutsche.”
Deutsche Bank gained 1.8 percent to 29 euros by 12:58 p.m. in Frankfurt trading, reducing the decline this year to 26 percent. UBS rose 2.4 percent to 11.41 francs in Zurich, also trimming this year’s slump to 26 percent.
Deutsche Bank and UBS reported earnings a day before European Union leaders meet in Brussels to hammer out a package to bolster the region’s rescue fund, recapitalize banks and convince investors to cut Greece’s debt load to prevent contagion from spreading to Italy and Spain.
“The banking business should continue to be influenced during the next months by the volatile global financial markets and lower trading volumes,” lowering revenue in investment banking and asset management, Deutsche Bank said today. “Lack of a credible and sustained resolution to the European sovereign debt crisis will continue to adversely impact client activity and revenue generation across corporate banking and securities.”
‘Headwinds for Growth’
Deutsche Bank reported third-quarter profit that beat analysts’ estimates as gains in consumer banking and asset management cushioned a decline in trading revenue. The company had net income of 725 million euros ($1 billion).
UBS said third-quarter profit dropped 39 percent after reporting a $2.3 billion loss from unauthorized trading last month. Net income fell to 1.02 billion Swiss francs ($1.16 billion), surpassing analysts’ estimates.
“Prospects for global economic growth remain largely contingent on the satisfactory resolution of euro-zone sovereign debt and banking industry concerns, as well as issues surrounding U.S. economic growth, employment and the U.S. federal budget deficit,” the Swiss bank said. “In the absence of such developments, current market conditions and trading activity are unlikely to improve materially, potentially creating headwinds for growth in revenues and net new money.”
While European lenders grappled with concerns over Greece and policy makers’ calls to boost capital, the biggest Wall Street firms posted their worst quarter in trading and investment banking since the depths of the credit crunch.
Lower Trading Revenue
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment-banking revenue plunged 41 percent from the second quarter to $4.47 billion.
UBS’s Naratil said the company will be vigilant on costs and that staff reductions at the investment bank won’t necessarily be tied to “massive layoffs.” The Zurich-based bank in August announced plans to cut 3,500 jobs, including 1,575 positions at the investment bank.
UBS may announce further job cuts of about 1,700 at the investment bank in November as well as an additional reduction in risk-weighted assets of 70 billion francs on top of about 100 billion francs it had planned to cut to prepare for the stricter Basel III capital requirements, JPMorgan Chase & Co analyst Kian Abouhossein estimated.
Global banks have announced about 137,000 job cuts in the past 12 months, with 87,000 coming from European-based lenders, according to data compiled by Bloomberg Industries. More firings are likely as the ones already announced were in response to weak business in the first half of the year and markets have deteriorated since, Matthew Clark, a London-based analyst at Keefe, Bruyette & Woods Ltd., said earlier this week.
Deutsche Bank, which had a core Tier 1 capital ratio of 10.1 percent at the end of September, will see that measure of capital strength fall after the company switches to tougher rules on capital, known as Basel 2.5, this quarter.
Krause said Deutsche Bank can raise its capital level to more than 9 percent next year as European regulators push for the region’s lenders to boost the gauge of financial strength to that threshold. EU leaders are asking bondholders to take losses on Greek debt to help rescue the country and pushing lenders to raise about 100 billion euros in capital by mid-2012 to boost their resilience, two people briefed on the matter have said.
UBS’s Tier 1 capital ratio increased to 18.4 percent from 18.1 percent at the end of June, under Basel 2 standards.
The world’s biggest banks are also negotiating with EU leaders over the size of losses on their Greek bonds as they seek a deal to cut the country’s debt load. Deutsche Bank Chief Executive Officer Josef Ackermann is helping lead the talks as chairman of the Institute of International Finance, the lobby group for 450 of the world’s biggest financial companies.
The German lender said today it wrote down the value of its Greek debt by 228 million euros to reflect worsening market prices. The exposure has been marked to market and amounts to 46 percent of the notional value, it said today.
--With assistance from Nicholas Comfort in Frankfurt. Editors: Frank Connelly, Stephen Taylor
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