March 29, 2024

DealBook: UBS and Deutsche Bank Results Underscore Anxiety Over Risk

Kacper Pempel/Reuters

FRANKFURT — Two of Europe’s largest financial institutions delivered a reminder on Tuesday that investment banking remains a fickle source of revenue, as UBS issued a profit warning and Deutsche Bank reported earnings that were below expectations.

UBS, Switzerland’s biggest bank, warned that it would probably miss an earnings target set two years ago after its profit fell by half in the second quarter, in part because of a dismal performance at its investment banking unit. Deutsche Bank fared better, reporting a 6 percent increase in net profit that still missed forecasts. Revenue from trading fell because of uncertainty caused by Europe’s debt crisis, the bank said, while warning that profit from investment banking would fall short of targets.

The results may help reinforce Deutsche Bank’s decision on Monday to split its leadership between Anshu Jain, the head of its volatile investment banking business, and Jürgen Fitschen, a member of the management board with closer ties to the more stable retail banking business in Germany. They will succeed Josef Ackermann, who is expected to become chairman of Deutsche Bank’s supervisory board, in May.

While banks have experienced a recovery in investment banking profits since the financial crisis, they are under pressure by regulators to reduce risk, and they continue to face market turbulence caused by the European sovereign debt crisis and the budget deadlock in the United States. In addition, there are signs that growth is slowing in Europe.

Deutsche Bank has responded by putting more focus on its network of branches in Germany, while UBS is slashing costs.

“Banks’ returns have declined overall in the last 12 months, reflecting deleveraging and the actions being taken in advance of increased capital requirements,” Oswald J. Grübel, the chief executive of UBS, said in a statement.

UBS’s profit fell to 1 billion Swiss francs ($1.2 billion) in the three months through June, from 2 billion francs in the comparable quarter a year earlier, the company said. Pretax profit in the investment banking unit slumped to 376 million francs, from 1.3 billion francs in the same period last year.

UBS said in 2009 that it intended to reach a pretax profit of 15 billion francs by 2014. But Mr. Grübel said on Tuesday that goal “is unlikely to be achieved in the original time frame.”

Mr. Grübel added that UBS was “likely” to “book significant restructuring charges later this year” after a series of cost cuts.

Mr. Grübel has been focusing UBS on its main wealth management and investment banking activities to repair a bank that was among the hardest hit in the financial crisis.

But some analysts have recently started to doubt that Mr. Grübel’s plan would be enough. Its investment banking unit has continued to struggle, and the stricter capital requirements have hurt profitability.

A string of departures by bankers and lower appetite for risk among clients have hampered efforts to repair the unit.

UBS said Tuesday it plans to cut costs by as much as 2 billion francs over the next two to three years. At the same time, a decline in demand for its services because of a weaker economic outlook is expected to “constrain growth prospects.”

Deutsche Bank, the largest bank in Germany, said it increased revenue from noninvestment banking businesses such as retail banking, helping lift net profit to 1.2 billion euros ($1.7 billion). The numbers showed that Deutsche Bank was making progress in reducing its dependence on investment banking. Pretax profit in the corporate and investment bank was flat at 1.3 billion euros, while pretax profit from private clients and asset management more than doubled to 684 million euros, the bank said.

“Our efforts to recalibrate and rebalance our platform are paying off nicely,” Mr. Ackermann said in a statement.

Deutsche Bank said that Europe’s sovereign debt crisis has unsettled investors and led to lower sales and trading revenue, making it unlikely that the bank would meet its pretax profit goal for 2011 of 6.4 billion euros for the investment banking unit. However, the bank as a whole will still meet its full-year pretax target of 10 billion euros because of improved performance by the other units, Deutsche said.

Deutsche Bank also said it took a charge of 132 million euros to reflect the decline in value of its Greek bonds. It thus became one of the first European banks to recognize losses from Greece following a debt-relief agreement by European leaders.

“While the earnings environment remains tough for investment banks, Deutsche Bank has fared better than European peers and arguably faces lower short-term earnings risk,” Jon Peace, banking analyst at Nomura International, said in a note.

Late Monday, Deutsche Bank resolved a leadership crisis by saying that Mr. Jain and Mr. Fitschen will share chief executive duties. Mr. Ackermann, 63, has been chief executive since 2002.

Investors had favored Mr. Jain, 48, whose unit continues to supply by far the greatest share of profits, as chief executive. But Mr. Jain, a native of India who is not fluent in German, was regarded as not ready to assume the statesmanlike duties expected of the head of an institution that holds a prominent place in the nation’s identity.

Mr. Fitschen, 62, is expected to help overcome reservations by Deutsche Bank staff members about Mr. Jain.

Julia Werdigier reported from London.

Article source: http://feeds.nytimes.com/click.phdo?i=aa5049bc0a5be6b4e29327a0908b0510

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