Deutsche Bank and Barclays have plenty of similarities. Both are rooted in their respective European home countries, both have investment banks historically skewed towards fixed income trading, both appointed new CEOs in the second half of 2015, both have latterly engaged in hiring freezes. While Deutsche, however, struggles to penetrate the fast-growing U.S. market, Barclays is very well ensconced in the Americas thanks to its 2008 acquisition of Lehman Brothers. And, after years of cost cutting, Deutsche's banking analysts now consider Barclays well placed to face the future.
Barclays' investment bank stands to benefit from the falling pound
With the pound at a two month low this morning following intimations from the British government that the country won't seek membership of the single market when it leaves the EU, Barclays' investment bank should benefit from currency changes in 2017.
Barclays reports in sterling, but around 60% of its investment banking revenues are earned in U.S. dollars - meaning that as the dollar rises against the pound, the bank automatically benefits. Even if the pound remains flat at current levels against the dollar, Deutsche's analysts say "tailwinds" from dollar-denominated revenues should continue to benefit Barclays in year-on-year comparisons. In the first and second quarters of 2017, Deutsche's analysts are therefore predicting a 16% to 17% increase in Barclays' sterling denominated revenues even if the bank's actual dollar revenues are flat. For the full year, they're predicting that this exchange rate effect will lead to a revenue increase of 10%.
In other words, Barclays' investment bank is almost certain to have an excellent 2017.
At some point, these exchange rate effects could turn negative. Barclays' FX strategists are forecasting a weakening in the U.S. dollar between 2018 and 2020 and this could prove a drag on Barclays' revenues if and when it happens. That, however, is in the future.
Barclays' investment bank is building momentum, gaining market share
While Deutsche's investment bank is losing traction, Barclays' investment bank (ie. its M&A, ECM and DCM operations) are gathering momentum.
Deutsche's analysts point out that Barclays gained market share in M&A and equity capital markets (ECM) last year and that gains are expected to continue in 2017.
Source: Deutsche analysts
Cost cutting in the investment bank could be tapering
Barclays is still cutting costs in its investment bank. At the end of 2016, it revealed a decision to cut 5,000 desks or 25% of London office space, a move which compounded existing worries about Brexit among the bank's UK staff.
However, in the third quarter conference call Staley also indicated that the £400m of restructuring costs pencilled in for 2016 should fall away in 2017, suggesting major restructuring work at the bank should be over.
Deutsche's analysts point out that costs in Barclays' investment bank should fall automatically this year as previous years' deferred bonuses exert less of an overhang on costs. Bonuses at Barclays are typically deferred over a three year period, and deferrals at Barclays have fallen considerably since 2013.
Source: Deutsche analysts
If costs at Barclays are to be cut anywhere, they should be cut in the UK business, excluding the investment bank
If Barclays' investment bank is done with cost cutting. the same can't be said of the bank's UK retail and commercial business. As Deutsche's analysts point out, costs have fallen 14% in Barclays' investment bank since 2014. In the UK operation, however, costs have only fallen by 3%.
If costs are to be cut anywhere at Barclays in 2017, it's therefore, surely in the UK retail and commercial business. Temporary staff in these businesses look especially dispensable.
By comparison, if Deutsche's right then Barclays' investment bank looks like a good bet. Now could be the time to join Tim Throsby and Jes Staley at one of the growth stories of 2017.
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