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As low rates squeeze profit margins, lenders rush to keep up with U.S. rivals
By Patricia Kowsmann
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 1, 2019).
Ultralow interest rates and political and economic uncertainty are forcing Europe's banks to confront an imperative they have been slow to respond to: cut costs fast or risk falling even further behind U.S. rivals.
As the latest quarterly earnings season draws to a close, evidence is mounting that banks in Europe are trying to react as low rates continue to squeeze profits and competition from U.S. banks bites deeper. The answer for most is downsizing, cost-cutting, refocusing or some combination of those.
Deutsche Bank AG, arguably the world's most troubled bank, is undergoing deep changes, shedding many of its global ambitions to focus more on German companies. London-based HSBC Holdings PLC is pulling back in commercial banking and investment banking in low-growth Europe. UBS Group AG, which focuses on wealthy clients out of Switzerland, is on a cost-reduction drive and a structural overhaul that will see its investment banking unit double down on those wealthy customers. And many banks across the Continent are either already charging customers on their deposits or considering doing so.
Several banks said in third-quarter earnings that they were abandoning previously set financial targets after results came in below expectations, a sign their most recent efforts may not be enough.
"When you can't find a way to grow revenue, all you can do is cut costs and find ways to be more effective," said Tom Kinmonth, a fixed income strategist at Dutch bank ABN AMRO Bank NV.
Interest rates have been low in Europe for years, as the European Central Bank tried to use the tool to incentivize companies and households to spend. But as economies around the Continent started showing signs of a downturn, the ECB was forced to double-down on the strategy, setting the stage for a low-rates environment for years to come.
The ECB's key deposit rate is currently minus 0.5%. That has created a twisted world for banks in which deposits, usually their lifeblood, have become a headache. The Association of German Banks estimates that its banks, which tend to park a lot of excess liquidity with the ECB, will pay EUR1.9 billion yearly because of the negative rate.
"It has always been a matter of fact that for banks, the more deposits the merrier," Mr. Kinmonth said. "Now that idea has been turned upside down."
Banks in Germany, Switzerland and Spain have started charging corporate and rich clients for their deposits. Credit Suisse Group AG will soon start charging customers with over CHF 2 million in deposits a 0.75% interest rate.
Dutch lender ING Groep NV, which offers many services for free, said one of the options it is considering is introducing some fees. In Denmark, at its second-largest bank, Jyske Bank, anyone with deposits above roughly EUR100,000 is being charged 0.75% interest.
"Interest rates have been negative for so long, we just got to a point we had to pass them," a Jyske spokesman said.
While charging customers helps, it isn't enough. So banks are also looking for ways to attract depositors to make investments that generate fees for the banks. ING, for instance, has teamed with French insurer AXA SA to offer insurance products to customers.
The pain has banks casting around for creative solutions. Earlier this year, UBS and Deutsche Bank explored forging an unusual alliance of their investment-banking operations, as they sought ways to save costs and increase their scale to better compete with U.S. banks, The Wall Street Journal reported, citing people familiar with the discussions. A deal never coalesced. JPMorgan Chase & Co. and Goldman Sachs Group Inc. have both taken advantage of the weakness of Europe's banks to expand across the Continent.
One tie-up that did go through was between Spain's Banco Santander SA and France's Credit Agricole SA, which earlier this year said they would combine their custody and asset-servicing operations, creating a EUR3.34 trillion custodian business with more scale to compete.
"Banks are looking more into cost-efficiency and into finding a new business model that allows for better cross-selling opportunities," said Marco Troiano, deputy head of the banks team at rating agency Scope Ratings.
Deutsche Bank, for instance, said it would eliminate about 18,000 jobs -- roughly one in five full-time employees -- by 2022. HSBC, which Monday posted a 24% fall in net profit in the third quarter, has embarked on another round of restructuring that will also see staff cuts and the bank leaving some operations, including its large retail banking in France. German lender Commerzbank AG is seeking to unload its profitable Polish unit, something unthinkable until recently.
Banks that have done big overhauls in recent years are already better off. Mr. Kinmonth cited Credit Suisse, which four years ago decided to scale back investment banking and focus on its wealthy clients. Shares of Credit Suisse are up more than 12% this year, while UBS shares are flat.
"This difficult environment is an opportunity for the European banking system to restructure," Mr. Troiano said. "Sooner or later they may be facing competition from a large technology company such as Amazon or Facebook, and they must be ready to compete with them."
and Jenny Strasburg contributed to this article.
Write to Patricia Kowsmann at firstname.lastname@example.org
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November 01, 2019 02:47 ET (06:47 GMT)
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