Shakeups at HSBC Holdings Plc and Deutsche Bank AG in the past 48 hours highlight Europe’s struggle to adapt to the post-financial crisis landscape.
The giant financial institutions are struggling to bolster shareholder returns amid rising regulatory requirements and waning trading revenue. As a result, the focus has shifted to deeper expense cuts.
HSBC, Europe’s largest bank, said Tuesday it will cut as many as 25,000 jobs through 2017 as Chief Executive Officer Stuart Gulliver seeks to trim costs by about $5 billion. Deutsche Bank on Sunday named John Cryan as its next CEO, unexpectedly replacing co-chiefs Anshu Jain and Juergen Fitschen amid growing investor unrest.
“Banks have to reinvent themselves to be simply banks,” Bill Blain, a London-based strategist at Mint Partners Ltd., told Bloomberg Television. “That requires proper bankers running the organizations, which is why you’re seeing managers brought in rather than the guys we saw in the past, the gifted investment bankers who’d created investment-banking empires.”
In contrast to the U.S., where regulators forced the biggest banks to fix their balance sheets during the 2008-2009 crisis, Europe’s institutions are still struggling to bolster capital amid an anemic economy. HSBC’s return on equity in 2014 was 7.3 percent and Deutsche Bank’s was 2.7 percent. That compares to U.S. firms such as Goldman Sachs Group Inc. which had an 11 percent return on equity in 2014.
Banks in the Stoxx Europe 600 Index fell 3.7 percent from the end of 2009 through Monday, compared with a 71 percent jump for financial companies in the Standard & Poor’s 500 Index. HSBC lost 13 percent and Deutsche Bank dropped 34 percent in the period.
Rebellious shareholders have “pushed the likes of Deutsche Bank and HSBC into streamlining and cost-cutting,” said Brenda Kelly, head analyst at London Capital Group.
Jain rose to prominence building Deutsche Bank into Europe’s biggest investment bank and a leader in debt trading. The institution has struggled to adapt to new rules that made some activities less profitable. Jain will leave the bank at the end of June and Fitschen will step down next May.
Billions in Fines
Adding to the executives’ challenges are legal troubles that have mounted up to billions in legal bills at both London-based HSBC and Frankfurt-based Deutsche Bank.
Fines, settlements, customer compensation and associated provisions cost HSBC $3.7 billion in 2014. Deutsche Bank was fined $2.5 billion in April by regulators in the U.S. and the U.K. for manipulating interest-rate benchmarks. The penalty was the biggest yet that Deutsche Bank had to pay for misconduct and came on top of 7.1 billion euros ($8 billion) the lender spent on litigation in the previous three years.
“Large universal banks are starting to ask whether they have the right business model,” said Andre Spicer, professor at Cass Business School in London. There is “recognition the bank can’t do everything for anyone. Instead, if it is to be trusted, profitable and sustainable, it needs to focus on a few markets where it has genuine expertise.”
Gulliver made the same point as he announced plans to pull out of Brazil and Turkey and reduce risk-weighted assets.
“The world has changed and we need to change with it,” Gulliver, former chief of the investment bank said in a statement. “I’m confident that our actions will allow us to capture expected future growth opportunities and deliver further value to shareholders.”
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