In a bid to stay profitable, yet another bank is cutting jobs. Swiss banking giant UBS (NYS: UBS) recently announced that it would be slashing 3,500 jobs as part of a cost-cutting measure. But what will this mean for the bank?
The bank has said it will be terminating nearly 5% of its workforce in order to obtain operational efficiency and eliminate annual expenses to the tune of $2.5 billion by the end of 2013. The move will result in one-time charges of $620 million, and comes after the approximately 50% drop in its second-quarter earnings.
A sluggish global economy, stricter regulations, and increased capital requirements have made it difficult for UBS to achieve its long-term profit targets. This, apparently, calls for some serious cost restructuring, which seems to be a trend in the industry currently. With HSBC (NYS: HBC) slated to cut 25,000 jobs between now and 2013, Lloyds Banking Group (NYS: LYG) planning to shed an additional 15,000 jobs, Barclays (NYS: BCS) cutting 3,000 jobs, and Royal Bank of Scotland (NYS: RBS) laying off 2,000 jobs, this is the hottest strategy to maintain cost efficiency in the banking industry today.
Soaring Swiss franc
The soaring Swiss franc, caused by the currency's safe haven status as financial markets have gyrated, has forced the Swiss National Bank to cut interest rates to near zero -- a measure taken to stem the risks to price stability in Switzerland. All Swiss banks, including UBS, if they are to follow suit, will be hampered by these conditions. Fellow Swiss bank Credit Suisse (NYS: CS) also saw a 52% dip in its quarterly profits due to the lingering global economic fears and recently cut 2,000 jobs.
Given these conditions, in order to protect itself and stay profitable, UBS is now moving to slash its workforce. But how long can the bank sustain its profitability on the back of job cuts?
Let's take a look at how the company is performing as compared to its peers.
Revenue Per Employee
Lloyds Banking Group
Royal Bank of Scotland
Source: Capital IQ, a Standard & Poor's company. NM = not mentioned.
UBS already has one of the highest revenue per employee ratios, and the job cuts could help the bank improve the ratio. UBS also has one of the lowest operating ratios among other banks in the given table. This shows that it is doing fairly well in managing its expenses.
In the wake of persisting global economic uncertainty, the banking sector in general has seen a fall in stock prices, resulting in low P/BV ratios. However, UBS, Credit Suisse, and HSBC still have much higher multiples than their peers, reflecting higher investor confidence in those companies (despite UBS' recent vogue trader snafu).
The Foolish bottom line
Though market volatility, UBS' conservative outlook, and the drop in its second-quarter results are discouraging, this bank looks all right to me at the current market price.
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At the time thisarticle was published Navjot Kaur does not own any shares in the companies mentioned above.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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