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Three’s a crowd

9 Jul 2015 By Dominic Elliott

Barclays faces the biggest test in retooling its investment bank. Chief executives at the UK lender, Credit Suisse and Deutsche Bank have now all left, meaning new leaders will tackle their respective divisions’ futures. All three have lost market share to Wall Street over the last few years. But the UK bank’s shrinking broker-dealer revenue makes it the top contender for further slippage.

Each of the banks has distinct investment banking challenges. Credit Suisse looks to be the weakest on capital: the group allocates equity on the basis of 10 percent of the segment’s risk-weighted assets. Had it done so at 12 percent of RWAs, as Barclays and Deutsche did last year, its investment bank’s pre-tax return on equity would have been 5 percentage points lower.

That would still have been comfortably above Deutsche’s, however. Blame the German lender’s exorbitant cost base, which devoured 77 percent of the division’s 2014 revenue and 85 percent of the top line in the first quarter. If Deutsche’s cost-to-income ratio had been 69 percent, like for Credit Suisse and Barclays in the three months to March, the German bank’s ROE would have been 12 percent.

Barclays could also have produced a first-quarter investment banking ROE of that magnitude, were it not for a mammoth effective tax rate linked to the foreign exchange market rigging scandal.

But Barclays has a bigger issue: its investment bank has shrinking revenue. Credit Suisse produced more investment banking revenue than the UK bank last year – a first since Barclays’ integration of Lehman Brothers. Barclays also ceded its sixth-ranked position in fixed income trading last year to its Swiss rival, according to Coalition. Of the 14 investment banking businesses tracked by the research provider, last year Deutsche had top-three market share positions in six, Credit Suisse in four, but Barclays in just one – rates trading.

The good news for executive chairman John McFarlane is that Barclays’ non-core assets are easier to wind down than Deutsche’s, reckons Morgan Stanley, and the bank’s first-quarter ROE improved. But market positioning matters, especially in trading. Despite McFarlane’s recent backing for the business, Barclays may yet lose more ground in investment banking.



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