By Max Colchester and Jenny Strasburg
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 27, 2017).
New bosses took the reins at Barclays PLC and Deutsche Bank AG
two years ago promising sharper strategies and clearer paths for
the embattled lenders. Investors are still foggy on the CEOs'
vision.
Both big European banks said Thursday that trading revenue
declined 30% in the third quarter, a disappointing result even
considering the historically low market volatility. On average,
U.S. banks' trading revenue dropped half that amount this past
quarter.
Barclays's shares slumped 7.4%, while Deutsche Bank's stock fell
0.9% on Thursday. No major European lenders' shares have performed
worse since the start of the year. The pressure is rising on Jes
Staley and John Cryan, chief executives of the British and German
lenders, respectively, to deliver results rather than
reassurances.
Both banks have already gone through significant overhauls. At
Barclays, Mr. Staley implemented a plan to ditch billions of
dollars in assets, exit more than a dozen countries and cut 60,000
staff. The former J.P. Morgan Chase & Co. banker has spent the
past three months telling investors and analysts that the
restructuring at Barclays is complete.
At Deutsche Bank, Mr. Cryan has also axed clients, business
lines and thousands of employees, settled big regulatory probes and
is planning to list part of the German bank's asset-management
business. But the British Mr. Cryan has been dour about Deutsche's
outlook, warning that it could still take years to turn the bank
around.
However, investors don't see how much or when the big changes
will ultimately pay off for either bank. "These European banks
don't look good compared to the U.S. banks," said David Stowell, a
former investment banker who teaches finance at Northwestern
University's Kellogg School of Management.
A lot of what the European banks are doing to fix technology and
legal problems, the U.S. banks already did, and now American
lenders stand to benefit more from regulatory relief at home. "Some
trading clients have been concerned about the European banks," Mr.
Stowell said. "Part of it is a perceptual problem, but that's how
markets work."
While Europe's economic rebound is helping fuel retail and
corporate banking businesses, analysts question whether European
investment banks have the muscle to take on U.S. rivals. Deutsche
Bank and Barclays are the world's sixth- and seventh-largest
investment banks by revenue, according to data by Coalition.
On Thursday, Barclays recorded a third-quarter profit, helped by
a fall in regulatory fines and operating costs. But the subsequent
share drop reflects how investors are becoming skeptical that Mr.
Staley can build a competitive investment bank without pouring in
huge resources. The bank said shareholders would have to wait until
early next year to get clarity on dividends.
Meanwhile, Mr. Staley is pushing on with a plan to revamp the
markets business by redeploying capital into the unit and recently
hiring about two dozen new bankers. "We have a way to go," he said
on Thursday.
Deutsche Bank faces a similar investment-banking headache. On
Thursday, it said its third-quarter profit more than doubled,
beating analysts' expectations, even though trading and overall
revenue dropped sharply. Deutsche Bank, once one of the world's
most highly leveraged banks, has had to wean itself off the
borrowing and capital-intensive trades that once juiced profits.
Investors by and large accepted that it had to happen eventually,
but they want to see proof that the German bank can maintain much
of its dominant presence in fixed-income trading.
After losing ground there last year, the bank has clawed back
some fixed-income business, but investors say it isn't enough.
Goldman Sachs Group Inc. European banking analysts on Thursday
called both Deutsche Bank's and Barclays's third-quarter results
weak, highlighting their dismal investment-banking performance
relative to U.S. peers.
To be sure, there is a major difference between the two banks:
Barclays has a profitable U.K. retail and credit-card business it
can lean on when its investment bank undershoots. Deutsche Bank
lacks a second profit machine that is on a par with its investment
bank. Of the two bank CEOs, "Cryan inherited far and away the
hardest job," said Barrington Pitt Miller, portfolio manager
covering global financials at Janus Henderson Investors.
Recently, Barclays Chairman John McFarlane canceled a vacation
and spent several days analyzing the British bank's financial
results, according to a person familiar with the matter. He found
that, if current regulations were applied, the bank met its cost of
equity only once in the past decade. But it is unclear what
Barclays can do differently.
Analysts say winding down its underperforming European
investment bank would cost too much. At a recent meeting in a posh
stately home, Barclays's board members continued to back the
current strategy, according to people familiar with the matter.
But Mr. Staley's future could be out of their hands. The banker
is being probed by U.K. regulators over his efforts to unmask a
whistleblower. Mr. Staley has apologized for his actions, but some
senior Barclays staffers fear that he may be forced to throw in the
towel. On Thursday, Mr. Staley said that the probe was continuing
and didn't comment further.
Pressures on Deutsche Bank have contributed to recent tensions
in its executive ranks, including between Mr. Cryan and Paul
Achleitner, the chairman, The Wall Street Journal reported this
month, citing people close to both men. Some of the people said any
tensions are natural and manageable, but evidence of the clashes
has caught the attention of clients and investors, people close to
the bank say.
As Deutsche Bank executives weigh internal budget requests for
next year, they are having to manage large costs to fix badly
outdated technology and competing requests for money to deal with
Brexit preparations and hiring in the investment bank, the people
say.
Mr. Cryan said Thursday in a statement that the bank has made
significant progress in turnaround plans. "We are convinced that
the benefits of our efforts will step-by-step become more apparent
in the coming quarters and years," he said.
Write to Max Colchester at max.colchester@wsj.com and Jenny
Strasburg at jenny.strasburg@wsj.com
(END) Dow Jones Newswires
October 27, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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