If ever there were a parable on the difficulties of an investment bank cutting its way to growth versus the more straightforward approach of growing its way to growth, Deutsche Bank and Barclays would appear to be it. The two European banks both reported their third quarter results today. One has been cutting in preparation for growth. The other has been taking a more straightforward approach. Guess which looks more healthy?
As was probably to be expected, Deutsche Bank's new retail banking CEO has been all about job cuts to Deutsche's corporate and investment (CIB). As page eight of the presentation accompanying the German bank's results makes clear, most of the jobs that were removed from Deutsche Bank since June came out of the CIB. By comparison, other areas have barely been touched. The latest cuts follow cuts in the second quarter too, such that 931 front office staff and 363 back office staff (net) have disappeared from Deutsche Bank's corporate and investment bank in a year. All these cuts have been accompanied by what Deutsche CFO James von Moltke described today as "restrictive hiring." - Few new people have been allowed in; except, of course, 750 cheap graduates.
Deutsche's shriveling headcount was accompanied by a shriveling of pretty much everything else. As the chart below shows, revenues in every area of Deutsche's investment bank - save equity capital markets (ECM) - declined year-on-year in the third quarter. And in absolute terms, the €39m revenue increase in Deutsche's tiny ECM business was a pinprick compared to the €307m that were lost in its fixed income business. Some of this was deliberate - Deutsche willfully pulled out of the U.S. repo business, curtailed its U.S. equities business and closed U.S. focused corporate finance teams. Nonetheless, double digit revenue declines look excessive and were queried by analysts on the bank's investor call.
If Deutsche Bank looks diminished, the same cannot be said for Barclays. While Deutsche talks of cuts, the British bank has been crowing about all the new people it's hired. So far this year, Barclays says it's added 275 external hires to its markets business. Since the start of 2017 it's added 50 managing directors (MDs) to markets. Over the same period, it's added 33 MDs to its banking (M&A, ECM and DCM) business. It's been investing in technology. It's been investing in data science. Barclays has even been investing in equity researchers.
As a result, Barclays' sales and trading results juxtaposed against Deutsche Bank's (below) look rather stark. Barclay is growing. Deutsche is doing the opposite.
Barclays doesn't break out the performance of its M&A, ECM and DCM businesses separately, but here the British bank's advantage is less pronounced, - Barclays' banking fee revenues were down 15% in the quarter; Deutsche's were only down 2%. Barclays blamed weakness in ECM, where Deutsche Bank was contrastingly super strong. Deutsche also cited strong growth in leveraged loans.
Deutsche Bank now going for growth
So what next for Deutsche Bank? It still has over 1,700 job cuts (across the bank) to make in the fourth quarter. It still plans to cut costs (although next year's €21bn cost target has been jettisoned). It still plans to extract costs from the investment bank through "efficiencies," but it's also chasing growth. CEO Christian Sewing and CFO Von Moltke said repeatedly today that the focus is now on, "stabilizing and growing the revenue base," from the new and intentionally reduced client footprint in the CIB.
Will this be possible? It will take some turnaround given that total revenues in Deutsche's CIB fell 13% quarter on quarter and 15% year-on-year in the past three months. Deutsche doesn't have much room for mistakes. Even after all Sewing's cuts, costs still consumed nearly 95% of revenues at the bank in the third quarter (up from 85% on year earlier). The return on equity in the corporate and investment bank is still just 1.1%. The margin for error is tiny.
Worse, as Jeremy Sigee, a European banking analyst at Exane, pointed out on Deutsche's call, the German bank's risk appetite (as measured by its Value at Risk) appears to be falling as the bank's cost of capital rises in line with its falling credit rating. "You keep saying you're going to take more risk and it doesn't happen," said Sigee. "If I were running a trading desk at Deutsche Bank, I would say I'm not going to bother as I'm not going to get paid anyway - or that funding costs are so high that it's not worth taking risk."
Von Moltke responded to Sigee by admitting that some of Deutsche Bank's trading businesses have suffered as a result of the bank's new BBB+ credit trading, but noted that ratings agencies downgraded the bank on concerns about costs rather than capital and risk taking. If Deutsche can increase revenues and cut costs, all will therefore be fine. Simple.
Barclays, meanwhile, is going for growth too. Revenues in Barclays' corporate and investment bank were largely flat in the third quarter compared to the previous year, but the UK bank generated a return on equity of 6.6% in the business operating costs were 'just' 79% of operating income. The British bank is investing in electronic trading and a new iPortal system single entry point for its corporate banking clients. It seems to have momentum, which is more than can currently be said for DB.
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