(Bloomberg) -- Deutsche Bank AG is retreating from its Wall Street rivals. Barclays Plc still thinks it can take them on.
The paths of two of Europe’s biggest investment banks are diverging after trading revenue slumped 17 percent at Deutsche Bank in the first quarter and climbed 8 percent at Barclays. The German lender outlined plans to retrench on Wall Street, while its British rival boasted of a performance that was “more than double the average of the U.S. investment banks.”
“We’ve clearly gained market share in the markets business,” Barclays Chief Executive Officer Jes Staley said in an interview with Bloomberg TV. “It’s one of the most profitable quarters we’ve had in corporate and investment banking.”
Both firms have undergone revamps and strategy reversals since the financial crisis as they struggled to adapt their investment banks to an era of tougher regulation and lower risk-taking. That strain led to the ouster of John Cryan as CEO of Deutsche Bank this month and the installation of retail-banking veteran Christian Sewing, who’s scaling back the firm’s global ambitions. By contrast, Staley views this quarter’s performance as vindication of a business that he’s repeatedly defended, even as it often underperformed.
“It’s very much a tale of two halves in European investment banking,” said Gildas Surry, who helps oversee 1.3 billion euros ($1.6 billion) at Axiom Alternative Investments in London, including Barclays and Deutsche Bank bonds. “It shows how management and leadership remains key in investment banking in order to deliver results and loyalty.”
Total revenue from trading and investment banking at Deutsche Bank fell 13 percent from a year earlier to 3.8 billion euros, while the division’s return on tangible equity, a key measure of profitability, fell to 1.5 percent from 5.6 percent. Both increased at Barclays.
Sewing announced Thursday that Deutsche Bank will scale back its U.S. interest-rates trading unit, review its global equities business with a view to shrinking it and focus more on Europe. The bank warned of “material job cuts” this year, particularly at the investment bank. The project may signal an end to a multi-decade effort by Germany’s biggest lender to compete with U.S. firms like Citigroup Inc. and Goldman Sachs Group Inc. on their home turf.
“We have really an inefficient use of our balance sheet in certain of our businesses in the U.S., so the starting point is to reduce that leverage exposure,” Deutsche Bank Chief Financial Officer James Von Moltke, who joined from Citigroup in late 2015, said in an interview with Bloomberg TV. “That means rescaling a little bit in the U.S. and acknowledging that we can’t compete against our U.S. brethren in terms of scale in every business, product, market, client segment.”
Barclays has piled resources into the same business, hiring executives from hedge funds and competitors last year, investing in technology and encouraging employees to take more risk. The bank pulled about 10 billion pounds ($14 billion) of risk-weighted assets out of “low-returning” corporate lending and shunted it into higher-risk, higher-return trading divisions, along with about 50 billion pounds of “leveraged balance sheet,” according to a presentation that listed reasons for the improved performance.
Stock Trading Divergence
Revenue at Barclays’s equities-trading unit surged 28 percent to 590 million pounds in a quarter when volatility in markets climbed to levels not seen in three years. When translated into dollars, the performance exceeded the 32 percent total gain reported by the five biggest U.S. banks, the firm said.
Stock-trading income at Barclays, which fell 9 percent last year, got a boost from equity derivatives, contracts that clients can use to speculate on stocks or protect their holdings, the presentation shows. Deutsche Bank, by contrast, said an “underperformance” in equity derivatives across Europe, the Middle East and Africa contributed to a 21 percent tumble in equities revenue to 543 million euros.
Staley, who has faced calls to jettison the investment bank, may still encounter resistance. The bank’s directors will review progress of his strategy in November and will question it if he hasn’t established a path to sustainable profits by then, Bloomberg reported last month. And he must reckon with Edward Bramson, the activist investor whose Sherborne Investors bought more than 5 percent of Barclays in March and who is keen to push for change, a person familiar with his views said at the time.
“We look forward to a robust conversation with Sherborne,” Staley told Bloomberg TV. “We appreciate the interest and the investment in Barclays.”
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