By Steve Slater
LONDON, April 30 (Reuters) - Cost-cutting and resilienttrading revenues helped Europe's investment banks keep pace withtheir U.S. rivals last quarter and boosted prospects that theirslimmed-down operations can deliver rewards for investors.
First-quarter results from Europe's big four investmentbanks - Deutsche Bank, Barclays, UBS and Credit Suisse - showed a performancenearly identical to that of their U.S. peers.
"They have all shown cost discipline. Cost control is verymuch the order of the day and will be for several years tocome," said Simon Maughan, analyst at Olivetree Securities.
After years of low returns, profitability also leapt. While returns on equity of 16 to 50 percent will have beendisproportionately boosted by the strong first quarter, it doessignal that banks can survive higher capital demands with leanermodels.
"It shows the business models were bloated and inefficient.A vast amount of balance sheets were earning negative returnsand the higher capital (requirement) has had the positive impactof getting rid of a lot of that," Maughan said.
UBS, which said in October it would fire 10,000 staff andwind down its fixed income business in scaling down itsinvestment bank, cheered investors with a 927 million Swissfranc ($998 million) profit at its investment bank on the backof a 21 percent rise in income.
"OUR MODEL WORKS"
"While it is too early to declare victory, we have shown ourbusiness model works in practice," said Chief Executive SergioErmotti, the former Merrill Lynch and UniCredit banker who tookthe helm at UBS 18 months ago.
Personnel costs fell 4 percent from a year ago, and thereturn on attributed equity jumped to 50 percent.
UBS's cutbacks still have some way to go - it has only shed2,000 staff so far - and the bank also needs to prove its modelworks when trends shift, analysts said. It was helped by therelative strength of equities and advisory, the areas it isfocusing on, while bond market activity was weaker.
Income from equities across Deutsche, Barclays, UBS andCredit Suisse rose 11 percent on the year on average andadvisory revenues were up 15 percent, similar to increases seenby U.S. rivals. Fixed income revenues held up better thanexpected, with income down 4 percent on average, compared to a5-10 percent drop at their U.S. rivals.
Jon Peace, banking analyst at Nomura, said the Europeaninvestment banks had fared well compared to U.S. peers in thefirst quarter, after previously lagging their U.S. rivals whenthe euro zone crisis hurt activity.
"If you choose the areas to compete in and focus on that, itshows you can do relatively well and hold onto market share,"Peace said.
RESHAPING
All Europe's investment banks are reshaping themselves asweak economic growth and tougher regulations have eaten intoprofitability for many business lines - and suggested that bigmay not be better.
Deutsche Bank is cutting pay and 1,500 jobs across itscorporate banking and securities unit, and aims to hive off 125billion euros of risky assets into a segregated unit, as newco-chief executive Anshu Jain pares back the investment bankbusiness he used to run.
New Barclays CEO Antony Jenkins has pledged to stick withinvestment banking, but to trim it back and cut 1,800 jobs.
Credit Suisse has had a more gradual streamlining and hassaid it can prosper despite lacking the scale of U.S. rivals.
Returns on attributed equity in the investment bankdivisions in the first quarter were 16 percent at Barclays, 25percent at Deutsche Bank and 27 percent at Credit Suisse.
UBS and Deutsche Bank shares jumped more than 6 percentfollowing their results, helped by Deutsche's success in raising2.96 billion euros ($3.87 billion) from shareholders to bolsterits capital. Analysts said the placement showed there wasappetite for bank shares where there was confidence thatinvestment banks could cut costs and improve returns.
The DJ STOXX Europe bank index closed up 0.22percent at 171.64 points by 1330 GMT, up 5.2 percent this year.The DJ U.S. bank index is up 11 percent this year.
Barclays (BARC)