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Battle of the bulge

29 October 2015 By Dominic Elliott

Deutsche Bank’s slow-and-steady approach to its investment banking turnaround could eventually trump that of more advanced peer Barclays. Both European universal banks on Oct. 29 reported third-quarter figures and detail on their structural revamps. While Barclays looks to be ahead on both fronts, the German lender’s superior positioning could make it a long-term winner.

Co-Chief Executive John Cryan’s tortoise-like approach to strategy, the final details of which were released on Oct. 29, received an initial thumbs down from Deutsche investors. There’s little to cheer: no dividends for two years, barely bigger cost cuts despite a net 26,000 reduction in headcount, and the retention of an unambitious 10 percent return on tangible equity target, albeit brought forward two years to 2018. Deutsche shares fell as much as 6.9 percent in morning trading.

Despite a 1 billion pound charge related to domestic and U.S. ring-fencing rules, Barclays’ shares fell slightly less. Revenue at its investment bank for the three months to September rose 9 percent from a year earlier. Unlike at Deutsche, which did well in the structurally challenged fixed-income business, Barclays did best in the capital-light business of advising companies on mergers and capital raisings, where all investment banks want to grow. Fees at the UK bank from this work rose 20 percent year-on-year – more than at any Wall Street or European investment bank that has reported.

Yet overall, Deutsche’s investment bank has more going for it. The German lender made 28 percent more third-quarter revenue than Barclays with just 20 percent more in risk-weighted assets. That means that when Cryan cuts investment banking RWAs by 28 billion euros to 172 billion euros – to Barclays’ level – Deutsche should still generate more revenue. It has top-three positions in trading rates, credit and currencies, and in emerging markets, according to Coalition, while Barclays has none. And the research house says Deutsche made more revenue last year in the Americas – a region that includes the world’s biggest fee pool – despite Barclays’ acquisition of Lehman Brothers.

Europe’s big investment banks face a race peppered with obstacles. Deutsche needs to cut trading assets, avoid as much litigation as possible and navigate U.S. structural separation requirements. But Barclays has only made more definitive progress on the first of these. As in Aesop’s fable, the tortoise could eventually win out.


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