Deutsche Bank and Barclays: Trans-Atlantic Drift

Investment banks appear to diverge dramatically, but for now, the differences are easy to overstate

By Paul J. Davies

Change in revenue for first-quarter 2018 over the same period in 2017 in U.S. dollars

Source: the companies
Note: Currencies converted at end of period rates

Investment banking yielded surprises at Deutsche Bank and Barclays in the first quarter of 2018: the former’s revenue looked as horrible as the latter’s did outstanding.

However, neither of Thursday’s results gave much clarity to investors. It isn’t clear that Deutsche can stop losing market share, or that Barclays is really regaining much. Big questions remain about where they go next—and at Deutsche whether the new chief executive, Christian Sewing, really can make any big changes.

Barclays saw some of the best first-quarter revenue gains in equity and bond trading of any bank, but its true performance was somewhat obscured. The U.K. bank might look good partly because it did much worse than rivals in the comparable period of 2017. However, there is another tricky element: It moved some funding and hedging costs to its head office from the investment bank and that may have flattered this quarter’s revenue. 
Deutsche, on the other hand, was obscure in its intentions more than its numbers. Mr. Sewing, just two weeks into his new role, brought a sterner, sharper tone to match his pledges of speed and clarity in making changes. However, the detail was absent.

Deutsche Bank’s new CEO Christian Sewing brings a sharper tone. Photo: armando babani/epa-efe/rex/shutt/EPA/Shutterstock 

The investment bank will see “material” cuts to staffing—the numbers aren’t clear—and the U.S. and Asia will bear the burden because that is where Deutsche does less profitable business that is less connected to the rest of the bank.

Deutsche’s first-quarter numbers underlined the need to act. The bank suffered its wearily familiar problem: revenue fell across the group and costs rose. This isn’t the way to boost returns. 
The investment bank led the declines with an even worse performance than had been feared. Bond trading did worse than rivals and Deutsche suffered the ignominy of being the only bank to have lost revenue in equities trading at a time when heightened volatility gave almost everyone else a major boost.

The fear for investors is that as managers take their scythes through the investment bank again, more front-line bankers and traders will walk away and take revenue with them. And Deutsche won’t be able to cut other people and costs fast enough in response.

The bank has little financial room for maneuver: its profitability is thin, limiting the extra costs it can bear for restructuring. Radical change might just be unaffordable, whether it is wanted or not.

The biggest problem for Deutsche, Barclays and other European banks is that they are still trying to sort out their investment divisions, while their U.S. rivals enjoy higher profits and perhaps regulatory easing. It is tough to make repairs when the race is under way.

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