Leading European banks reported dismal profits on Tuesday, blaming everything from the continent's debt crisis and Spain's property market crash to Facebook's disastrous stock market debut.
Within a space of an hour UBS of Switzerland, Deutsche Bank, BBVA of Spain and Austria's Erste Bank delivered the bad news on an industry already beset by investigations into a number of scandals.
Deutsche Bank, Germany's flagship lender, announced it will axe 1,900 jobs under a plan to cut costs by 3 billion euros ($3.7 billion) and streamline its business. New co-Chief Executive Anshu Jain said expectations on profitability had moved "closer to our grim scenario".
Banks are suffering from the euro zone crisis that politicians are struggling to solve, a transatlantic investigation into interest rate-rigging and regulators tightening the screws on the industry.
"This is the longest tunnel I have ever been in and there's no sign of light at the end of it," said an investor who is a top 10 shareholder in Royal Bank of Scotland and holds some other bank shares.
The sharp drop in profits cast doubt on whether formerly blue riband banking sectors will ever recover the levels of profitability they enjoyed before the crash of 2008-2009.
"The question is whether we are entering a new paradigm, not only in investment banking but in wealth management and other products areas that are going to see lower returns," said Chris Wheeler, analyst at Mediobanca in London. "We are not going to return to pre-crisis levels even in wealth management, the question is how much lower will it be."
UBS, which had recovered well after being bailed out by the Swiss state, reported its second-quarter profit more than halved to 425 million Swiss francs as its investment bank made a loss after trading.
The bank took a 349 million Swiss franc ($356 million) loss on its role as a market maker on U.S. social networking site Facebook's flotation in May.
UBS blamed U.S. stock exchange Nasdaq's "gross mishandling" of the offer and plans to take action against the exchange. Facebook shares have shed around 40 percent of their value since the company's ill-starred debut.
AWAITING A RESOLUTION
UBS Chief executive Sergio Ermotti warned investors against expecting any rapid recovery. "A return of confidence can only happen when clients believe there is a clear and lasting resolution to today's economic and political challenges, and this will take time," he said.
Weak economic growth or outright recession across Europe has hit the banking industry, not least in Spain where the government has already agreed to take up to 100 billion euros in European Union aid to save its most troubled lenders.
A property market crash and recession has hurt even BBVA , Spain's second biggest bank which is not expected to need EU help. Its first-half profit slumped by a third as it set aside cash to cover losses on its toxic real estate loans, as all the country's banks have been ordered to do.
BBVA, which is based in the relatively prosperous Basque country, will have to set aside more in the future and the impact of its sickly home market may be a drag for years.
Deutsche Bank also suffered a drop in trading at its investment bank where profit plunged 63 percent, underscoring the problems facing its new leaders.
In one of his first acts as co-CEO, former investment bank boss Jain is cutting numbers in what had been nicknamed "Anshu's Army". Most of the redundancies will come by the end of the year and be outside Germany - likely to include hundreds in London.
Costs at the investment bank represented 87 percent of income, and return on equity was just 5 percent, well below its cost of capital
In Austria, Erste Bank cut its 2012 profit outlook for the second time in three months in the face of deteriorating economies across Europe.
By later afternoon, UBS shares were down 6.2 percent, Erste shed 5.6 percent and Deutsche Bank was down 0.3 percent. BBVA was flat. The European bank index dipped 2.75 percent.
Investors worry there is more pain ahead, particularly in the fallout from the rate-rigging scandal and in Britain from mis-selling insurance and complex interest rate hedging products.
Britain's Barclays was fined $453 million last month by U.S. and UK regulators for rigging interest rates, and more banks are expected to be dragged in.
More than a dozen, including UBS and Deutsche Bank, are being probed by investigators looking at whether Libor and Euribor benchmark rates were manipulated.
UBS said on Tuesday it had appropriate provisions for all litigation. Deutsche Bank did not say whether it had set aside funds for potential costs.
Corporate treasurers, pension funds, charities and other investors are seeking advice on whether to pull their money out of banks, nervous that earnings will be eroded for some time by fines.
"There appears to be a common denominator: the absence of appropriate cultural and ethical values to guide bank management and governance," said George Dallas, director of corporate governance at F&C Investments.
One bright spot is that banks have remained in the black, in contrast to the darkest days of 2008/09. Deutsche Bank may need to raise capital, some analysts reckon, but there appears unlikely to be an immediate industry-wide dash for cash.
But even banks that are performing relatively well are struggling to regain investors' trust. S olid results from HSBC , Europe's biggest bank, on Monday were overshadowed by its $2 billion hit to cover fines and mis-selling. ($1 = 0.9811 Swiss francs)
(Writing by Steve Slater; Additional reporting by Sinead Cruise, Arno Schuetze, Sonya Dowsett; Editing by David Stamp)
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