Scars still raw as banks feel pressure over cost-cutting

Europe’s banks are under pressure to show how they plan to step up cost-cutting and shrinkage when they announce first quarter results in forthcoming weeks, as the scars from bad loan losses and indebted economies refuse to fade.

The recent near-collapse of Cyprus’s banking sector has shown that eurozone shocks may not yet be over and as losses from bad loans continue to rise, analysts are looking to see banks take action in response.

“In an environment where top line growth is still slow and returns are still below the cost of equity, then more action on cost cutting is one of the main levers the banks are able to pull,” said Jon Peace, analyst at Nomura in London.

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Banks have done well at shrinking their balance sheets and have cut risk-weighted assets by about a quarter, according to a report last week by Morgan Stanley and Oliver Wyman. The same report showed they have made less progress on tackling costs, which have only come down by 4 per cent.

HSBC, Barclays, Deutsche Bank, UBS and Credit Suisse are all axing jobs and reshaping to show they can improve profitability and deliver dividends to investors.

In particular, new bosses at Barclays, Deutsche Bank and UBS will be expected to show progress in their shake-up plans. HSBC, Europe’s biggest bank, started its revamp earlier than most, and next month is expected to target another $1bn in savings after reaching its $3.5bn annual target. That is likely to mean thousands more job cuts.

“Every bank now has a cost saving plan and preaches a new cost mantra. 2013 will be about delivering on these cost savings, especially as the easiest wins should come earliest,” said James Chappell, analyst at Berenberg Bank.

However some are concerned that banks may be underestimating the impact on revenue from the cuts, adding to an already significant hit from low interest rates and tougher regulations.

Several countries have stepped up scrutiny on capital and leverage at banks in recent months, which analysts said could delay a rise in dividends and prompt more asset sales, such as Lloyds’ plans to sell its asset management arm.

Losses from bad loans are expected to remain high while the eurozone crisis drags on, notably in Spain, Italy and other peripheral countries, where struggling small companies are a particular worry. Many banks will be shielded from the full impact, however, after Spain and Italy told their banks to hike provisions for bigger losses.

First-quarter results from Spain’s Santander, BBVA and Caixabank are due next week, just after Barclays, which is to report its results on Wednesday, and Credit Suisse kick off the reporting season.