Wanted: an Investment-Banking Champion for Europe

(Bloomberg Gadfly) -- It's been a mixed quarter for Europe's investment banks, and a downright dreadful one for Deutsche Bank AG. There's little sign of a turnaround in the region's financial firms that could threaten the growing market share of their Wall Street peers. It will take more cage-rattling from investors, including activists, to pressure CEOs into doing more to improve returns.

Results from Deutsche Bank and Barclays Plc on Thursday offered little to inspire long-term confidence. Both saw group revenue decline, with a pick-up in activity on financial markets failing to offset the squeeze from low interest rates and stiff competition. Deutsche Bank's profits were almost wiped out by stubbornly high costs, while misconduct charges pushed Barclays into a loss.

European banks have had a tough time defending their market share against competition from the U.S. – Morgan Stanley analysts estimate both Barclays and Deutsche Bank lost ground in investment banking last year. Equities trading may have been a bright spot for Barclays and UBS Group AG, in the first quarter but few European firms have matched the average 6 percent rise in investment-banking revenue seen across the Atlantic.

Deutsche Bank CEO Christian Sewing is in a particularly rough spot, given the amount of foot-dragging by the board that has destroyed shareholder value in recent years. He is trying to front-load as much of the bad news as possible, promising to eliminate jobs and scale back in the U.S. But the timescale for the revamp -- four years -- looks slow. And it comes at a price: the bill will be almost $1 billion this year. The decision was necessary, but carrying it out won't be easy or quick.

At Barclays, Jes Staley may have had better news to report: the British bank's return on tangible equity was a lofty 11 percent. But it's still going to be difficult for analysts to pencil in a better outlook for profit based just on the first quarter. Earnings were flattered by a low level of loan losses, while capital buffers were eroded by misconduct charges. Staley can point to a falling cost base at the investment bank as a defense against any saber-rattling by activist Edward Bramson. But this is only one quarter's improvement -- and the upbeat conditions for trading desks have already faded.

Both CEOs will need to do more to close the valuation gap with their peer group. Barclays trades at a one-third discount to book value, and Deutsche Bank at a 50 percent markdown. Regulators have set the bar for balance-sheet strength, and central bankers for borrowing costs. With rates normalizing in the U.S., and Europe due to follow suit eventually, investor pressure to get out of more businesses, cut costs and reallocate capital isn’t going to let up.

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

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