More bloodletting to come for European bankers

Seven years after the collapse of Lehman Brothers, Europe's largest banks are poised for more bloodletting.

New management teams at Deutsche Bank, Barclays and Standard Chartered are among executives contemplating reorganisations that could involve thousands of job reductions.

Deutsche Bank, which runs Europe’s biggest investment bank, may trim 8,000 positions across its businesses, a person familiar with the matter said this week. Banks are weighing some of the deepest revamps since the financial crisis as stricter capital rules erode trading income and record-low interest rates squeeze margins in consumer banking. That contrasts with the US, where banks were quicker to raise capital levels and reduce costs after the 2008 credit crunch and are now profiting from a rebound in the economy.

“The top line at banks is under pressure in the low-yield environment and regulators are taking a relatively severe stance on capital,” said Dirk Sebrechts, who helps manage more than €200 billion at KBC Groep NV in Brussels. “They have to look into their options on costs.”

Investment banks have already seen some of the steepest cuts. Europe’s biggest lenders shrank headcount at their securities units by almost a third since the end of 2010, according to the latest filings of 10 banks which disclose the figures. Those companies cut their total staffing by 23 per cent to 870,315 over that period. “The US corporate and investment bank business remains fundamentally more profitable than Europe or Asia,” said Philip Keevil, a partner at Compass Partners in New York. “Revenues in Europe have been soft due to anemic economic growth and lack of demand.”

The European banks saw revenue from their securities units fall 31 per cent on average last year from 2010, their filings show. The top five US investment banks generated $134.1 billion of combined revenue from that business last year, 2.3 per cent more than in 2010, data compiled by Bloomberg show. “The Europeans have tried to shrink their way to profitability and that destroys the franchise and income line,” said Chirantan Barua, a banking analyst at Sanford C. Bernstein in London. “That’s why you have seen a revised strategy every two years.”

The diverging fortunes of European and US banks is reflected in their share performance. The STOXX 600 Banks Index declined 1.5 per cent since the end of 2010, compared with a 39 per cent gain in the KBW Bank Index of US lenders.

Capital demands

The capital bar is still rising as rule-makers try to fortify banks against the dangers that led to taxpayer bailouts following Lehman's demise. Global regulators are reviewing approaches for assessing operational and credit risk, considering a capital floor to reinforce risk standards and finishing a fundamental review of how banks calculate possible losses on securities held in their trading books. Tidjane Thiam, the new chief executive officer of Credit Suisse Group, Switzerland's second-largest bank, said in July he would make the business "less capital intensive and ensure we generate excess capital."

The bank will present a strategy in October that includes plans to sell the US private bank and scale back the prime brokerage and fixed-income businesses, Schweiz am Sonntag reported on Sunday. Those measures may be accompanied by a capital increase, the newspaper said.

Barclays, UniCredit

At London-based Barclays, Chairman John McFarlane told staff in a memo this month the bank will have to make “tough calls” to boost returns, a person with knowledge of the contents said. Standard Chartered’s new CEO, Bill Winters, may cut about a quarter of 1,000 senior banking positions as part of a plan to reverse a two-year profit slide, people with knowledge of the matter said this month. UniCredit SpA, Italy’s largest bank, and BNP Paribas SA, France’s biggest lender, are also working on revamps that may lead to job cuts, people with knowledge of the banks’ plans have said.

At Deutsche Bank, where John Cryan replaced Anshu Jain as co-CEO in July, the job reductions under consideration could be the largest since before the financial crisis. Most would probably affect administrative and technology jobs, although some client-facing positions may be eliminated, said the person familiar with the matter. The company declined to comment. Germany's largest bank has already announced that it will sell its Postbank retail unit, which employs about 15,000 people. On average, the 10 European banks generated revenue of $401,382 per employee in 2014, less than the $507,380 that the six biggest U.S. banks made per head, data compiled by Bloomberg show. "You can make cuts in the back office, there is some fat there, but there's a limit given salaries generally aren't as high as in the front office," Sebastien Pigeon, an analyst with Morningstar, said by phone. "What it comes down to is job cuts and pressuring that high cost-to-income ratio lower."

Bloomberg