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May 6 (Bloomberg) -- Barclays Plc and UBS AG, two of Europe’s biggest banks, posted contrasting first-quarter earnings that showed shrinking investment-bank operations can reward investors.

UBS, which has cut about 4,000 jobs since late 2012 and is exiting most debt-trading activities, rose 1.1 percent in Swiss trading after posting earnings that exceeded analysts’ estimates and pledging a special payout to shareholders. Barclays, which will update investors on its strategy on May 8, fell 4.5 percent in London after a drop in fixed income, currencies and commodities earnings hurt profit.

“UBS has been able to scale back its investment bank and in particular take a knife to FICC activities, because it has a more profitable, higher-rated business at its private bank to fall back upon,” Simon Maughan, head of research at financial- analysis firm OTAS Technologies in London, said by telephone. “In contrast, Barclays has become so wedded to the investment bank that it is very difficult to cut back, especially when it is still struggling with problems in the European arm of its retail bank.”

UBS shares have gained 8.3 percent this year, while Barclays is down about 10 percent, making it the worst performing U.K. bank.

First-quarter net income at Zurich-based UBS rose 6.7 percent from a year earlier to 1.05 billion Swiss francs ($1.2 billion). Barclays, the U.K.’s second-largest lender, said pretax profit fell by a bigger-than-estimated 5 percent to 1.69 billion pounds ($2.9 billion) as investment-bank earnings declined 49 percent.

Most Profit

Barclays Chief Executive Officer Antony Jenkins, 52, will on May 8 provide details of how he will overhaul the investment- banking division, traditionally the bank’s largest profit driver. He’s trying to revive the unit’s profitability by cuttings costs, in particular compensation, without losing key dealmakers. Despite increasing pay for investment bankers as a proportion of revenue, Barclays lost Hugh “Skip” McGee, the firm’s most senior banker in the U.S., Robert Morrice, chairman of the Asia-Pacific region, as well as investment-banking chairman Ros Stephenson.

The bank is under pressure to make further cuts at the investment bank and exit unprofitable businesses including some in consumer banking and at its fixed-income unit. Meanwhile, UBS CEO Sergio Ermotti, 53, has been planning to bolster earnings by focusing on money management, which requires less capital than investment banking, and divesting assets that are producing losses and eating up resources.

‘Money Spinner’

“UBS is further ahead,” said Philip Keevil, a New York- based partner at advisory firm Compass Advisers Group LLC, said by e-mail. “The Lehman U.S. business that Barclays bought had a big fixed-income operation. It also has been a big money spinner, and while it was, management was loath to cut. It seems that the tough decisions are now being made.”

UBS, whose annual return on equity averaged 22 percent over the seven years before it started posting losses in 2007, has struggled to revive profit as capital requirements increased. After reporting a loss in 2007, 2008, 2009 and 2012, return on equity dropped to 6.7 percent last year from 8.5 percent in 2011 and 16.7 percent in 2010.

That measure of profitability stood at 8.7 percent in the first quarter. Barclays’s return on equity was 6.4 percent.

--With assistance from Elena Logutenkova in Zurich and Elisa Martinuzzi in Milan.

To contact the reporter on this story: Ambereen Choudhury in London at achoudhury@bloomberg.net To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net Jon Menon

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