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DealBook: Barclays and Credit Suisse Post Strong Earnings in Investment Banks

Darren Staples/ReutersBarclays’ investment bank benefited partly from a bullish stock market performance in America.

LONDON — As European policy makers push financial institutions to cut back on their risky trading activity, some of the region’s largest banks are becoming more reliant on their investment banking operations to bolster performance.

On Wednesday, the British bank Barclays and a Swiss rival, Credit Suisse, both reported strong first-quarter earnings for their investment banks that helped to offset some sluggish growth in other divisions like retail banking and wealth management.

The healthy performance comes despite a push by European politicians to limit firms’ exposure to financial risks and to promote lending to local economies.

New tougher capital requirements have forced European banks to shed billions of dollars of assets since the financial crisis began. A proposed cap on banker bonuses that will become effective at European institutions next year has led to fears of a mass exodus of firms’ top earners to international competitors.

The two banks’ first-quarter earnings reflected the strength of investment banking.

Barclays’ quarterly pretax profit for its investment bank rose 11 percent, to £1.3 billion, or $2 billion, or roughly 74 percent of the company’s combined pretax profit over the period.

Over all, Barclays’ quarterly profit, when adjusted for one-time charges, was £1.8 billion, down 25 percent from the same period last year, which missed analysts’ estimates. The fall was linked to £514 million ($784 million) of costs related to a restructuring that includes 3,800 layoffs and a £235 million ($359 million) charge connected to the value of the bank’s debt.

Barclays’ investment bank benefited from renewed deal activity and a bullish stock market performance in the United States, where it now generates around 50 percent of its revenue. For example, the bank is advising Dish Network on its proposed $25.5 billion takeover of Sprint Nextel. “The reality is that investment banking is becoming more dominant for Barclays,” said Ian Gordon, a banking analyst at Investec in London. “The first quarter was a blowout performance.”

At Credit Suisse, pretax profit in its investment banking division rose 43 percent, to 1.3 billion Swiss francs, or $1.4 billion, partly driven by a strong performance in the bank’s fixed-income sales and trading business. In contrast, earnings from the company’s private banking and wealth management business fell 7 percent, to 881 million francs, over the same period.

Credit Suisse reported a net profit of 1.3 billion francs ($1.4 billion) in the first quarter, compared with a profit of 44 million francs ($47 million) in the same period last year, when the bank booked a loss of 1.6 billion francs ($1.7 billion) on the value of its own outstanding debt.

Analysts said the bank’s strong earnings were a result of a cost-cutting program started by the chief executive, Brady W. Dougan. The company’s investment banking division also benefited from a pickup in global stock markets in the first three months of the year.

“The investment bank was the main driver with impressive cost management,” Kian Abouhossein, a banking analyst at JPMorgan Chase in London, said in a research note to investors.

Shares in Barclays fell 1.3 percent in London on Wednesday, while Credit Suisse’s stock price rose 1.5 percent in Zurich.

Attention will now turn to other large European banks that will report their first-quarter earnings over the next few weeks.

Deutsche Bank, the largest bank in Germany and one with a major investment banking division, will announce its results on Tuesday, as will the Swiss banking giant UBS. Analysts are expecting a fall in UBS’s first-quarter net profit as the company continues to carry out sharp reduction in its investment bank, which includes around 10,000 job cuts, to focus on its wealth management business.

The continued reliance on investment banking at some of Europe’s largest institutions follows efforts by politicians and top banking executives to reshape the Continent’s financial sector.

Some banks, like UBS and Royal Bank of Scotland, are reducing their exposure to risky trading assets, while others, like HSBC and Standard Chartered, are increasing their operations in fast-growing emerging markets.

Antony P. Jenkins, Barclays’ chief executive, also is trying to rehabilitate the company’s image after a series of recent scandals. Last year, the bank agreed to a $450 million settlement with the United States and British authorities after some of its traders were found to have manipulated crucial global benchmark rates for financial gains.

Article source: http://dealbook.nytimes.com/2013/04/24/barclays-and-credit-suisse-post-strong-earnings-in-investment-banks/?partner=rss&emc=rss

European Central Bank Buys Bonds to Reassure the Markets, to Little Avail

The show of force initially bolstered Italian and Spanish bonds. But the move appeared to backfire as stock markets in Europe and the United States fell sharply after Jean-Claude Trichet, the central bank’s president, warned of dangers ahead, while the modest scale of the bank’s bond-buying apparently fell short of what investors considered adequate.

Compounding the tension, a top European official said that a deal reached two weeks ago to ease the debt crisis was not working and urged leaders to consider bolstering the region’s existing bailout fund.

European leaders decided last month to authorize the European Financial Stability Facility — the European Union’s bailout fund — to buy bonds in open markets, relieving the central bank of that responsibility. But it will take months before the rescue fund is able to start making purchases. In addition, European leaders did not increase the size of the fund, leaving questions about whether it would be up to the task if a country as big as Italy or Spain needed help.

The European Commission president, José Manuel Barroso, has been pushing euro zone leaders to do more. In a letter released Thursday, he called for a “rapid reassessment of all elements” related to the stability fund, so that it was “equipped with the means for dealing with contagious risk.”

He also criticized European politicians for “the undisciplined communication and the complexity and incompleteness” of the package agreed to at the summit meeting on July 21.

“Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis,” he wrote. “Whatever the factors behind the lack of success, it is clear that we are no longer managing a crisis just in the euro area periphery.”

As part of its response to the crisis, the central bank also moved to prop up weaker banks that may be having trouble raising cash, expanding its lending to euro zone institutions at the benchmark interest rate. The central bank left that rate unchanged at 1.5 percent, while the Bank of England left its benchmark rate at a record low of 0.5 percent.

Mr. Trichet declined to say what bonds the bank was buying or how much. He said the bank acted in response to “renewed tensions in some financial markets in the euro area.” It was the first such intervention since March.

Traders said the central bank had bought Irish and Portuguese government debt during the day. But the bank did not buy bonds of Italy and Spain, two countries with huge bond markets and now seen as most vulnerable in the region.

The move to buy Portuguese and Irish debt made little sense, given that they are insulated by their official bailouts and no longer have to raise money on the market, said Michael Leister, a fixed-income analyst at WestLB in Düsseldorf, Germany.

Mr. Trichet, however, had “opened the door to acting on behalf of Spain and Italy,” he added. The yield on 10-year Italian debt rose 11 basis points, to 6.19 percent. Yields on 10-year Spanish bonds rose three basis points, to 6.28 percent. Earlier, Spain sold 3.3 billion euros, or $4.7 billion, of bonds due in 2014 with demand more than twice the level of supply. But the average yield rose to 4.813 percent from 4.037 percent at a comparable auction in June.

“Over all, sentiment hasn’t changed yet,” Mr. Leister said after the central bank had acted. “Everyone’s afraid that the debt spiral will become a self-fulfilling prophecy. And the E.C.B. is the only institution with the firepower to stop the situation in the short term.”

The central bank first began buying bonds in the open market in May 2010 but tapered off the interventions earlier this year, a move investors may have interpreted as a lack of resolve. Michael T. Darda, chief economist at MKM Partners in Stamford, Conn., warned Thursday that half-hearted forays into the bond market “will fail, just like they did last year.”

“In each case, the debt crisis got worse instead of better,” he wrote in a note.

Jack Ewing reported from Frankfurt and Matthew Saltmarsh from London. Julia Werdigier contributed reporting from London and Rachel Donadio from Rome.

Article source: http://feeds.nytimes.com/click.phdo?i=c948eca5010fa388e3871223e7455649

DealBook: Barclays and Credit Suisse Post Strong Earnings in Investment Banks

European Central Bank Buys Bonds to Reassure the Markets, to Little Avail

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