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
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
"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 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
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
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
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
and Jenny Strasburg contributed to this article.
Write to Patricia Kowsmann at email@example.com
(END) Dow Jones Newswires
November 01, 2019 02:47 ET (06:47 GMT)
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