218-Year-Old Hamburg Bank Shuns Lenders and Prepares for Brexit

  • M.M.Warburg unconvinced by efforts to cut costs, boost profit
  • Asset management head envisages U.K. leaving EU in June vote

M.M.Warburg & CO, the Hamburg lender founded in 1798 by brothers Moses Marcus and Gerson Warburg, has turned its back on bank stocks and bonds, unconvinced by efforts in the industry so far to rein in costs and return to profitable growth.

M.M.Warburg, which manages more than 56 billion euros ($64 billion) in assets, expects the regulatory pressure on European banks to intensify, forcing lenders to take yet more steps to overhaul their businesses, Carsten Klude, asset management head and chief economist at the bank, said in an interview.

“We don’t see enough progress on the cost side by banks as a whole or an individual lender to make us spring into action,” Klude said.

Commerzbank AG became the latest European bank to prepare investors for weaker earnings this year as turbulent global markets, record-low interest rates and faltering growth across the euro area erode revenue.

Commerzbank Chief Executive Officer Martin Blessing said a “slow” first quarter will make it more difficult to match last year’s profit, just a month after the bank projected an increase in full-year earnings, in a speech to shareholders at the annual general meeting in Frankfurt. Larger competitor Deutsche Bank AG said last month it probably won’t be profitable this year.

Shares of Deutsche Bank, which runs Europe’s biggest investment bank, and Credit Suisse Group AG are the biggest losers on a gauge measuring the performance of the world’s ten largest investment banks this year. Deutsche Bank co-Chief Executive Officer John Cryan is cutting 9,000 jobs and reworking its IT systems to raise returns.

While Cryan’s strategy makes sense, doubts remain over his ability to deliver, said Klude. “If Deutsche Bank wants to remain an international bank, it mustn’t sacrifice too many business units for the sake of short-term cost benefits,” he said.

While European banks will likely remain off-limits for Warburg for the foreseeable future, U.S. lenders may entice the asset manager back to bank securities as early as this summer, said Klude. Earnings and outlooks of U.S. lenders look “pretty solid” as the Federal Reserve is set to increase rates this year and next, helping to boost the traditional credit business, he said.

With regard to the June 23 referendum that will decide the U.K.’s future in the European Union, Warburg is taking a cautious stance, avoiding any direct investment in U.K. shares and bonds until the outcome is known, Klude said.

M.M.Warburg expects a “thin majority” of voters to back a so-called Brexit as emotions will probably influence the decision more than the economic consequences that may come from an exit, he said.

Warburg’s assets under management “rose substantially” last year from 56 billion euros at the end of 2014 on capital inflows from existing and new clients as well as investment returns, spokesman Martin Wehrle said by phone. The lender plans to publish 2015 results in the coming weeks.

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