Quarterly reports by three of the biggest banks in Europe on Tuesday showed how, five years after the beginning of the financial crisis, they continue to pay for the sins and excesses of the boom years.
While the six largest United States banks earned a combined $23 billion in the three months through June, Deutsche Bank, Barclays and UBS could not manage profit of $1 billion among them. The fallout is measured not only in diminished earnings but also in the banks’ continued need to raise money to make themselves less vulnerable to risk and to set aside reserves to pay for any future legal scandals.
As the banks work their way through the rubble of the financial crisis and their own missteps, their focus on rehabilitation — rather than a full resumption of lending to businesses and consumers — continues to delay Europe’s economic rebound.
That stands in contrast to the big American banks, which despite their own legal and financial troubles were forced by the government to quickly resolve their problems. That has helped pace the United States recovery that is creating a widening growth gap between the two sides of the Atlantic.
American banks “pushed through the pain earlier than the European banks,” said James H. Gellert, the chief executive of Rapid Ratings, an independent analysis firm in New York. Now the European banks are trying to raise capital and revamp their businesses in the midst of a downturn.
The multiple challenges “not only have financial impact,” Mr. Gellert said, “they are seriously distracting to management.”
Banks around the world face growing momentum from regulations that would curtail their use of leverage, or borrowed money. The pressure is especially intense in Europe. Regulators were generally slower than in the United States to require banks to build up more capital after the global financial system all but froze up in the autumn of 2008 because those banks did not have the ability to withstand a sudden collapse in the market for mortgage-backed securities.
On Tuesday, Deutsche Bank, Europe’s biggest investment bank, reported a 50 percent decline in profit, worse than expected. More significant, it announced that it would shrink its financial holdings by 16 percent, or 250 billion euros, to reduce its exposure to risk.
The bank also added 630 million euros, or about $836 million, to a fund to cover the costs of defending against suits brought by investors who blame Deutsche Bank for losses they suffered, including some investments linked to the United States mortgage market.Barclays, of Britain, in reporting a loss, said it would raise £7.8 billion, or about $12 billion, in capital in part by selling new shares. Reporting a second-quarter loss of £168 million, Barclays said it would set aside an additional £2 billion to compensate investors after regulators ruled that the bank improperly sold them insurance and complex financial hedging products.
Antony P. Jenkins, the chief executive of Barclays, said the increase in capital would help stabilize the bank and allow it to increase its dividend to shareholders next year.
“It is early days, and there is a long way to go,” he said, “but I’m pleased with our progress.”
The Swiss bank UBS reported a nearly one-third increase in profit, but like Deutsche Bank and Barclays, its earnings were weighed down by legal costs and by pressure to build up capital reserves.
Investors duly punished Barclays, whose shares fell 6 percent, and Deutsche Bank, whose shares declined 4 percent. UBS shares rose more than 2 percent on what, on this day, looked almost like good news.
The three lenders symbolize problems in the broader European banking system, which is both a victim of the Continent’s economic malaise and a cause of it. American banks like Goldman Sachs and JPMorgan Chase have been able to ride an improving economy in the United States, but the European banks are still working through huge portfolios of damaged government bond holdings or sour real estate loans.
As the big European banks lick their wounds, their stinginess with credit is one of the main reasons that the euro zone is stuck in recession.
Jack Ewing reported from Frankfurt and Mark Scott from London.
Article source: http://www.nytimes.com/2013/07/31/business/global/banks-focus-on-recovery-is-miring-europes-economic-growth.html?partner=rss&emc=rss