(Bloomberg Gadfly) -- Nobody was expecting Deutsche Bank AG and Barclays Plc to shoot the lights out after a third quarter of weak volatility and trading volumes that even U.S. heavyweights struggled with. But there was at least a hope that a low bar would be cleared.
That faith has been dashed. Deutsche's slump in revenue was worse than even the most pessimistic analyst forecast. Barclays' pretax profit was a disappointment too. Both banks' sales and trading divisions performed worse than rivals across the Atlantic. Barclays shares fell about 7 percent, Deutsche's by 2 percent.
The bosses of both banks can point to some success in shrinking staff and costs, but not much else. In the face of rock-bottom interest rates that have pressured margins and a bull market that hasn't boosted trading volumes, bank CEOs have moved to pull the expenses lever. That's fair enough, given that central banks and regulators control most of the rest. Investors have endorsed this strategy. But the promised payoff still isn't in sight.
Deutsche's cost base, for example, looks much leaner than in the past. It reported 5.5 billion euros ($6.5 billion) in adjusted quarterly expenses, the lowest in years, which is bang in line with its target of 22 billion in annual costs. Barclays has slashed thousands of jobs under Jes Staley and sold its Africa business.
But not much else has clicked. Revenue at Deutsche fell 10 percent, dragged down by an awful three months for fixed-income trading, which also hurt Barclays. This is not unique to Europe, but profitability is especially weak. Group return on tangible equity at Deutsche and Barclays was 4.5 and 5 percent respectively. Their long-term targets are about double that. The road looks long.
What a bank like Deutsche needs is time -- several years, even -- to overhaul its IT systems, rebuild its brand after last year's loss of client confidence and reorganize businesses such as retail banking and asset management. Barclays, too, is promising brighter days will arrive -- after several years. Shareholders are realizing it really may take a long while to see results. They've had a wake-up call.
As bleak as the outlook is, it's not clear that calling for CEOs' heads would help. What secret sauce could another executive bring? Striking a merger or spinning off assets would be one way to offer more radical surgery to shareholders -- one activist investor wants Credit Suisse Group AG to spin off its investment bank. But bank boards don't seem in the mood for this. The restructuring workload would balloon and clients would shop elsewhere.
Boosting shareholder sentiment looks outside of top executives' control. Maybe Mario Draghi can say the right words to perk up investors' view of European banks. But expectations will probably have to be re-set lower either way.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.
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