LONDON (Reuters Breakingviews) - In his A Tale of Two Cities, Charles Dickens contrasted the trajectories of London and Paris amid the revolutionary upheaval of the eighteenth century. UK-based Barclays and Germany’s Deutsche Bank, both recently subject to radical internal transformation, provide a comparable study in the diverging fortunes of their modern-day investment banks.
Deutsche remains trapped in an era employees could liken to France’s Reign of Terror, where management’s guillotine falls on anyone who looks like a cost centre. A cull of 700 employees meant underlying expenses fell by 1 percent year-on-year to 5.5 billion euros, putting Deutsche on track to hit its 23 billion euro annual cost target. Less happily for the lender’s boss, Christian Sewing, greater blood-letting has not yet healed either the top or bottom line: thanks to a 9 percent year-on-year drop in revenue, mostly due to a 15 percent slump on the trading floor, the bank only scraped a 1.6 percent annualised return on tangible equity.
By contrast, Barclays boss Jes Staley can now stand on the barricades urging his rainmakers forward. The UK lender made an annualised 9.4 percent return, roughly in line with the bank’s cost of capital.
That should provide an effective riposte for would-be revolutionnaire Edward Bramson, the activist Barclays stakeholder who has urged Staley to cut investment banking in favour of steadier, more bourgeois retail and commercial lending.
Staley can’t yet declare final victory. Despite the investment bank growing significantly better than U.S. peers in both equities and fixed-income revenue – up 33 percent and 9 percent respectively – it still only eked out a 7 percent quarterly return, although that improves to a more respectable 9.6 percent on a nine-month basis. Barclays UK and its U.S. cards business both achieved roughly double that.
Deutsche, by contrast, remains trapped between terrible fixed-income trading and insufferable German retail banking, neither of which makes an economic return. Revenue is forecast to remain subdued, as implied by analysts’ low-ball projection of a 3 percent return on tangible equity for next year.
With Barclays’ tumult all but over and returns concurrently improving, shares valued at 65 percent of tangible book should rise. By contrast, the revolution at Deutsche, trading at just 40 percent of the net value of its assets, has a long and painful course to run.
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