US and European banks are making big profits, so why are they cutting jobs?

Banks in the US racked up heady second-quarter profits this year. Many, however, still plan job cuts.

Banks in the US racked up strong second-quarter profits this year. Many, however, still plan job cuts.

Goldman Sachs made about US$1 billion (Dh3.67bn) for the quarter, up 77 per cent from the same period last year. But it plans to reduce its workforce by about 1,000. Wells Fargo, one of the country's four biggest banks, made $3.9bn, up 29 per cent. It is planning 1,900 job cuts.

Cutting jobs while enjoying big profits might appear irrational, but analysts say the banks are making sound decisions.

Many have done well only because they funnelled money set aside during the financial crisis back through their income statements. They were, in effect, taking money from their savings accounts, putting it into their current accounts and calling it income.

The reality is that even though profits are strong at some banks, revenue growth is less appealing.

Wells Fargo, for example, saw net revenues decline 5.8 per cent in the second quarter compared with the same period last year. Its profits were up, but the amount of money coming in the door was down.

The problem is partly that people are not borrowing as readily - or as much - as they did before the global downturn. That has hurt revenues and will trickle down to the bottom line once banks exhaust the cash reserves they can write back on to their income statements as profits. With benchmark interest rates near zero and almost sure to stay there for years, the prospect of higher revenues any time soon is dim.

Banks make less money on loans in low-interest-rate environments.

Compounding their problems, US banks are still feeling the effects of the four-year-old subprime mortgage crisis. Bank of America lost $8.8bn in the second quarter because of low interest rates and mortgage defaults. Europe's banks face the added risk presented by the continent's sovereign debt crisis. Against that backdrop, some lenders there are cutting jobs even as both profits and revenues climb.

HSBC, for example, made $5bn in the second quarter, up 23 per cent from a year earlier. Revenues also rose. But it still pledged to cut 30,000 staff - the largest round of layoffs announced this summer.