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Bank Job Cut Stock Pops Rarely Pay Off: Street Whispers


Radical cost cutting is all the rage in investment banking as reports of massive layoffs at UBS (NYSE:UBS) and Barclays (NYSE:BCS) have sparked big rallies in the shares of both companies, but analysts are all over the map in interpreting the implications for the sector.

US-listed shares of UBS jumped nearly 20% in the first five trading days after the Swiss banking giant announced it would shed as many as 10,000 jobs and wind down the bulk of its fixed income trading operations. On Monday, Barclays PLC got a 5.81% pop following a Goldman Sachs report predicting it would slash headcount by 15% to 3500, while also reducing a measure known as risk-weighted assets (RWA) by15%.

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According to the Goldman report, UBS is targeting a 57% reduction in RWA, Royal Bank of Scotland (NYSE:RBS) is aiming for a 33% cut to RWA and a 20% headcount reduction, and Deutsche Bank (NYSE:DB) is targeting an 18% reduction in staffing levels and a 10% RWA drop.

Deutsche Bank's cost-cutting plan, announced in mid-September, also sparked a rally in the shares, lasting a few days and adding 10% to the German bank's market cap. Since then, however, the shares have moved sideways. RBS's cost cutting was announced in January. It also caused a big jump in the shares, though they gave up those gains in May before bouncing back in September.

What all this means so far, other than seemingly short-lived share price pops and out-of-work traders, remains to be seen.

JPMorgan analyst Kian Abouhossein argued in a November 5 report that the revenue opportunities from UBS's pullback would be "immaterial," for competitors--about $1.5 billion - $2 billion annually to be divided among six investment banks Abouhossein considers in the top tier. These include JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), Barclays, Deutsche Bank, and Goldman Sachs (NYSE:GS).

As a result, Abouhossein prefers second tier fixed income trading houses Credit Suisse (NYSE:CS) and Morgan Stanley (NYSE:MS) since he believes they have greater restructuring opportunities. He also continues to like UBS, a stock he has recommended for well over a year for its restructuring potential.

For Abouhossein, however, Deutsche Bank's announced restructuring doesn't rate a mention.

By contrast, Societe Generale analyst Dirk Hoffmann-Becking held up Deutsche Bank as a restructuring model, even as he upgraded UBS in a Nov. 1 report.

"The cost savings program is actually larger than the one at UBS relative to the overall cost base and obviously a lot less disruptive," he writes.

Hoffmann-Becking sees large potential revenue gains in fixed-income trading for investment banks as UBS effectively shuts down, led by JPMorgan (13.2%) Citigroup (11.8%) and Bank of America (9%). At the same time, however, he undercuts that projection by proclaiming himself "deeply skeptical of top-line driven investment cases in investment banking," adding "we assume zero revenue growth in all three investment banks we cover." Those three are Deutsche Bank and UBS, both of which he recommends, and Credit Suisse, on which he has a "hold."

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