Bloomberg

(Bloomberg) -- Record-low interest rates and wild market swings are eroding profit at Europe’s banks, with no end in sight.

From UBS Group AG’s wealth-management unit to Commerzbank AG’s consumer-lending business, income is shrinking as margins get squeezed and clients avoid trading. Executives at the banks, two of Europe’s biggest, warned not to expect an improvement soon.

“Commerzbank and UBS confirmed structural difficulties at European banks with generating profits when interest rates are at record lows,” said Mario Spreafico, who oversees 1.5 billion euros ($1.7 billion) as chief investment officer at Schroders Wealth Management Italy. “Banks can only seek to improve their earnings through aggressive cost cutting.”

Lenders across the Continent, still recovering from the costs of misconduct and the financial crisis, are struggling to increase revenue as the European Central Bank pushes interest rates below zero, regulators demand bigger capital buffers and market volatility spooks investors. While the banks have already fired thousands of workers and sold off billions of euros of assets, their best option to boost profit is to keep cutting, investors said.

Earnings Challenge

“At the moment, all management can do is keep costs under control and this won’t change any time soon,” said Gary Kirk, founding partner at London-based TwentyFour Asset Management LLP, which manages 5.4 billion pounds ($7.9 billion) of fixed-income assets including UBS and Commerzbank bonds. “European banks have a major earnings challenge.”

Those concerns have driven the Bloomberg Europe Banks and Financial Services Index down 21 percent this year, leaving its 39 members trading at an average of 0.68 percent of book value.

The four large European lenders that reported results on Tuesday -- UBS, Commerzbank, BNP Paribas SA and HSBC Holdings Plc -- have a combined 16 operating divisions with businesses ranging from French credit cards to U.S. stock trading. Revenue fell in 15 of them.

At UBS, Chief Executive Officer Sergio Ermotti has staked his bank’s future on managing the fortunes of the world’s wealthiest. This model came under pressure as rich clients avoided risk and the lender carried out an “abnormally low” number of transactions on their behalf, Ermotti told analysts.

UBS’s investment bank, meanwhile, posted its worst first-quarter performance since the financial crisis as deal-making slumped. The unit’s costs, which fell 26 percent to 1.5 billion Swiss francs ($1.57 billion), are still too high, leaving it at the mercy of turbulent markets, according to Christopher Wheeler, an analyst in London with Atlantic Equities LLP.

Ermotti, who has cut staffing at UBS by more than 4,000 since taking charge in late 2011, is looking at “tactical adjustments to its cost base,” he said.

While UBS is the biggest manager of money for the wealthy, Commerzbank is the largest lender to the Mittelstand, the mass of small and mid-sized companies that form the backbone of the German economy. Operating profit at its Mittelstand unit tumbled 43 percent to 209 million euros from a year earlier because of negative interest rates and regulatory levies.

It’s “obviously a very difficult environment,” Chief Financial Officer Stephan Engels said in an interview on Bloomberg Television Tuesday. Germany’s second-biggest lender, which fell the most in more than three years after first-quarter profit slumped, will “look at all the levers available,” he said.

Not Changing

HSBC, the London-based lender that focuses on Asia, said pretax profit fell to $6.1 billion from $7.1 billion a year earlier as revenue fell across each of its four main businesses. Operating costs fell 6.6 percent.

At BNP Paribas, the biggest French bank, earnings increased as the bank set aside less money for bad loans and benefited from an accounting gain. Still, pretax profit at the corporate and investment bank dropped by more than half as trading revenue sank.

“Clearly, the low interest-rates environment makes it difficult to get improved, profitable revenues,” said Karim Bertoni, a portfolio manager at Bellevue Asset Management AG in Switzerland. “This is not changing yet.”

--With assistance from Jeffrey Vögeli Stephen Morris and David de Jong To contact the reporter on this story: Donal Griffin in London at dgriffin10@bloomberg.net. To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Frank Connelly

©2016 Bloomberg L.P.

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