Deutsche Bank (DBK) AG’s finance chief said he expects profit at banks to rise in 2015, while UBS AG (UBSN) Chief Executive Officer Sergio Ermotti said Europe needs more reforms for earnings at the continent’s lenders to recover.
Profitability may rise within 12 to 18 months as banks increase capital levels and reduce costs, Stefan Krause, chief financial officer at Deutsche Bank, said at a conference in Paris organized by The Economist magazine today. HSBC Holdings Plc (HSBA) Chairman Douglas Flint, 58, said a horizon of one to two years is realistic if interest rates rise and barring any geopolitical shocks or unexpected costs.
Ermotti, 53, who spoke on a panel with the bankers, echoed Flint’s comments on rates while taking a different view on the timing of a recovery, saying any increase in demand for banking services will depend on higher confidence among investors.
“I’m not so sure there’s a 12- to 18-months solution,” he said. Europe faces “a structural problem that needs concrete and decisive actions in terms of reforms and only that can create growth for the economies and sustainable profitability for our industry.”
The world’s biggest banks have seen profit squeezed by stricter regulation designed to prevent a repeat of the 2008 financial crisis, as well as a wave of lawsuits and regulatory probes related to alleged misconduct. They responded by cutting jobs and eliminating costs to lift shareholder returns. That effort hasn’t ended and lenders have to be careful to invest in future growth, the bankers said.
“I’ve seen this movie before,” said Krause, 51. “We will see the same change that happened in the auto industry in the 1980s and 1990s after regulation in banking.”
Krause spent more than 20 years working for German luxury car maker Bayerische Motoren Werke AG (BMW) before moving to Deutsche Bank, Europe’s largest investment bank by revenue, in 2008.
Speaking of the automakers, he said that “large margin industry went very fast down the drain” when confronted with environmental regulation and competition from Japan. Banks must now restore their profitability by increasing efficiency as German car makers did, he said.
Reaching that goal will take time as banks still face the costs of remediating improper conduct by their employees in the past as well as expenses to comply with regulation, said Ermotti of UBS, the largest Swiss bank. Investors will be a driving force, he added.
“Shareholders, bondholders are much more focused on how we manage the bank,” the UBS CEO said. “Their capital is clearly now the first line of defense. They are forcing us to be very focused on how we allocate our resources.”
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