LONDON - Two of Europe's largest financial institutions reported on Tuesday that profit plunged in the second quarter as the banking industry continues to struggle with the debt crisis.
Deutsche Bank of Germany and UBS of Switzerland both were hit by drops in trading activity, which weighed on the firms' investment banking units. The banks warned that continued market volatility related to the crisis would most likely affect future growth.
Deutsche Bank's net income fell 46 percent, to 661 million euros ($811 million), during the second quarter of 2011. UBS's profit, which also reflects a loss on the Facebook offering, declined to 425 million Swiss francs ($435 million), a 58 percent drop.
As it looks to stem the financial pain, Deutsche Bank announced on Tuesday that it was cutting 1,900 jobs in an effort to raise profitability. Almost 80 percent of the layoffs will come from the firm's investment banking division.
The bank, which faces a number o f investigations and lawsuits over different matters, also said it was reviewing its compensation practices and internal code of conduct “as part of a range of measures to bring about a cultural change.â€
“We are firmly convinced that the industry must change its compensation model, and we are determined to be in the forefront,†Anshu Jain, who shares chief executive duties with Jürgen Fitschen, said Tuesday in a conference call with analysts.
On Tuesday, shares of Deutsche Bank rose 0.5 percent in Frankfurt in response to the job cuts, which will reduce annual costs by 350 million euros, or $430 million. UBS shares fell nearly 6 percent in Zurich, with the bank's net income well below analysts' estimates.
Like many big financial firms, UBS and Deutsche Bank are dealing with the fallout from a weak economy, tough market conditions and new regulation. The headwinds are particularly taking a toll on investment banking operations.
Deutsche Bank's investment banking division, which until recently had been the firm's most profitable unit, suffered a 63 percent decline in pretax profit, to 357 million euros ($438 million). Mr. Jain ran the unit until he took over as co-chief executive in May.
UBS also was pinched by a 349 million franc ($357 million) loss related to the botched Facebook initial public offering. The investment banking unit reported a pretax loss of 130 million francs ($133 million) in the second quarter.
Technical errors at the Nasdaq stock market delayed the start of trading of Facebook shares and later flooded the market with shares of the social network company. The problems caused UBS to receive more shares than its clients had ordered, according to a company statement.
“We will take appropriate legal action against Nasdaq to address its gross mishandling of the offering and its substantial failures to perform its duties,†the bank said.
In an effort to bolster their capi tal reserves, the European banks are slashing their exposure to risky assets. Mr. Jain said Deutsche Bank would raise capital to meet stricter requirements known as Basel III. The bank may also sell new shares - a step that would dilute the value of existing shares.
UBS also said it had cut its risk-weighted assets by 45 billion francs ($46 billion) in the second quarter. The bank now plans to reduce the total figure to 270 billion francs ($276 billion) by 2013, compared with the previous target of 290 billion francs ($296 billion).
Both firms are under investigation in connection with the manipulation of the London interbank offered rate, or Libor, and other benchmark rates. In late June, Barclays agreed to a $450 million settlement with American and British authorities after the bank reported false rates for financial gain.
On Tuesday, Deutsche Bank's chief financial officer, Stefan Krause, said that any wrongdoing at the firm “was limited to a small nu mber of individuals acting on their own initiative.â€
Sergio P. Ermotti, chief executive of UBS, said that the bank was cooperating with authorities and conducting its own internal review related to Libor and other benchmark rates. UBS set aside a further 130 million francs ($133 million) during the second quarter to cover litigation and regulatory costs, but did not say if the extra money was related to Libor.
“We have provisioned accordingly for all matters,†Tom Naratil, UBS's financial officer, told analysts.
Mark Scott reported from London and Jack Ewing from Frankfurt.
