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UBS's (NYSE: UBS ) rogue trader is getting all the attention, but other developments at the European banking giant could be much more significant for its industry. Following on the heels of rival Credit Suisse (NYSE: CS ) and a number of Wall Street giants, UBS (NYSE: UBS ) announced that it will cut 3,500 jobs to save an estimated 2 billion Swiss francs ($2.5 billion) annually.
Out of the total job cuts the company has announced, 45% would be from the Investment Banking division, 35% from Wealth Management and Swiss Banking, 10% from Global Asset Management, and 10% from its Wealth Management Americas businesses.
Caught at the wrong end of the Swiss franc
The Swiss franc appears to be at the core of what's hurting UBS and Credit Suisse. The relative strength of the currency has translated into losses primarily because most of the banks' costs are paid using the Swiss currency while their revenues are mostly in dollars or euros.
That shrinking feeling
Investment banks around the world have taken it on the chin from the massive losses their companies took over the past few years, coupled with increased regulations following the mayhem of the global financial meltdown. A looming debt crisis in Europe and America complicates matters further, as have fears of a second recession.
The more stringent rules require banks to hold more capital to safeguard them from going bankrupt. The aim is to encourage global financial stability by reducing banks' ability to take on excessive risks that could prove hazardous to the financial system and the economy as a whole. To do that, banks need to revamp their balance sheets by holding more equity against their assets to reduce dangerous leverage. Lower leverage would mean that banks wouldn't be able to rake in huge profits, since they'd have less cash to play with.
UBS isn't the first bank to announce job cuts.
- Credit Suisse recently announced that it will slash 2,000 jobs worldwide, or about 4% of its global workforce.
- Despite posting a surprising 5% increase in pre-tax profits, from $11.1 billion to $11.5 billion, HSBC (NYSE: HBC ) said it will cut nearly 10% of its workforce, which translates to 30,000 jobs, by 2013.
- Goldman Sachs (NYSE: GS ) announced in July that it will slash 1,000 jobs after posting disappointing quarterly numbers. Even though Goldman clocked an earnings increase, from $613 million a year ago to $1.09 billion, costly legal settlements of $550 million and a $600 million U.K. bank-tax slap wiped out the gains.
- Barclays (NYSE: BCS ) announced up to 3,000 job cuts recently, after its net profit nosedived 38% to 1.5 billion pounds ($2.45 billion) from having to compensate customers for selling them inappropriate insurance.
- Bank of America (NYSE: BAC ) has plans to remove 30,000 jobs. More than any of its competitors, Bank of America took a hard hit from the burst housing bubble and a subsequent gush in foreclosures. It has lost tens of billions of dollars because of its one horrifyingly costly mistake of acquiring subprime lender Countrywide Financial in 2008, just before the whole financial world went up in flames.
A silver lining?
There is a distinct possibility that today's pain could translate into tomorrow's potential gain.
Once financial institutions are deemed safe because of their reduced risk profile, the cost of capital for banks could come down -- at least on a non-subsidized basis. Relatively stable banks would also be able to issue debt at lower than average costs, and at the same time, shares of banks with less risk capital will command higher P/E multiples. So that's more than one reason to cheer if you're a long-term investor.
The Foolish take
The banking sector as a whole has witnessed a series of nightmares, primarily because of the 2008 subprime saga and now because of the looming debt crises in the eurozone and the United States. Banks have witnessed steep cuts in their share prices in recent months, and I don't think the worst is over yet. In the long run, I think banks will recover, but the situation could remain pretty volatile for a while, so I'm lying low -- at least until the U.S. and eurozone financial environment begins to crawl back up from the grave.
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