Deutsche and Barclays' fortunes could yet converge
(The authors are Reuters Breakingviews columnists. The opinions expressed are their own)
LONDON, April 26 (Reuters Breakingviews) - When Germans take on Brits at soccer, the Germans tend to win. Not so for the countries’ largest investment banks in the first quarter of the year. Yet Deutsche Bank (DBKGn.DE) and Barclays’ (BARC.L) fortunes could yet converge.
Income in Deutsche’s vaunted investment bank fell 11 percent year-on-year, while at Barclays it rose 3 percent. The difference in the two banks’ flagship fixed income, currencies and commodities arms was even more marked: Barclays increased its FICC income by 9 percent compared to the first quarter of 2011, while Deutsche’s shrank by 8 percent - though the German bank’s unit is still significantly larger.
Barclays says its victory came from increasing volumes through its powerful trading machine rather than the market rally pushing up the inventory of its assets. But another factor is Deutsche’s deleveraging. The German lender’s overall risk-weighted assets fell 3 percent from December to March, while Barclays’ RWAs were up 1 percent.
The banks also have different attitudes to risk: Deutsche’s daily average value at risk in the first quarter was 55 million euros - down about a third from the same period of 2011. Though Barclays doesn’t disclose the figure on a quarterly basis, its VAR was down just 5 percent year-on-year.
Both banks still face big capital challenges, though. If Basel III rules were fully in force, Deutsche’s RWAs would be a third higher by January 2013, and the bank’s core Tier 1 capital ratio under the new rules would be just 20 basis points above the regulatory minimum of 7 percent.
Barclays is in better shape – its 10.9 percent core Tier 1 ratio would slip to just over 9 percent if Basel III RWA inflation is factored in. But it will also probably have to clear a higher capital bar than its German counterpart. The UK’s Independent Commission on Banking wants UK banks to hold at least 10 percent core Tier 1 ratio, with seven percentage points of loss-absorbing debt or equity on top.
Despite Barclays’ stronger first quarter, investors still seem to have more confidence in Deutsche: the German group trades at 0.8 times Espirito Santo’s estimated full-year tangible net asset value, compared to Barclays’ 0.5 times. That probably reflects greater UK regulatory uncertainty. But given both banks exposure to reviving euro zone troubles, the ultimate results in 2012 could be a no-score draw.
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- Barclays on April 26 reported investment bank revenues in the first quarter of 3.5 billion pounds, up 3 percent on the first quarter of 2011. Income in fixed income, currencies and commodities (FICC) was 2.4 billion pounds, up 9 percent on the first quarter of 2011.
- Barclays reported net operating income for the first quarter of 2012 down 27 percent to 4.7 billion pounds, while a pre-tax profit of 1.7 billion pounds became a 475 million pound loss and a minus 4 percent return on equity. Adding back a charge reflecting the fair-valuing of Barclays’ own debt and a 300 million provision connected to payment protection insurance, return on equity was 12.2 percent.
- Barclays’ core Tier 1 fell marginally to 10.9 percent from 11 percent in December, as risk-weighted assets ticked up 1 percent to 394 billion pounds. Applying the extra 70 billion RWAs expected from Basel III immediately instead of over time, Barclays’ core Tier 1 ratio would be 9.3 percent.
- Barclays said continued challenging market conditions meant it was too early to establish the trend for the year.
- Meanwhile, Deutsche Bank reported net income of 1.4 billion euros for the first quarter of 2012. The figure, which was down 35 percent on the same period of last year, was dented by one-off charges including a loss on the sale of the Actavis pharmaceutical group.
- Revenue in the Deutsche’s corporate banking and sales division was 5.22 billion euros, down 11 percent year-on-year. Revenue in FICC was down 8 percent. The bank said it had gained market share, but that the lower volumes reflected market conditions as well as its reduced appetite for risk as a result of the ongoing euro zone crisis.
- Deutsche’s core Tier 1 capital ratio improved by 50 basis points to 10 percent. However, assuming the full impact of new Basel III rules, the bank said its core equity capital ratio would be 7.2 percent by January 2013. Stefan Krause, Deutsche’s chief financial officer, said the bank had other options available to improve its capital ratios if needed, and that it did not need to issue equity to meet regulatory capital requirements.
- By 1030 GMT, Deutsche shares were down 5.6 percent at 32.2 euros. Barclays shares initially rose 2.6 percent but then fell to 209 pence, down 1 percent.
- Barclays statement: link.reuters.com/gaj87s
- Deutsche Bank statement: link.reuters.com/haj87s
- Reuters: Weak markets and charges spoil Deutsche Bank’s Q1: [ID:nL6E8FQ0VA]
- Reuters: Barclays Q1 profit up on investment bank rebound [ID:nL6E8FQ1Z3]
Frankfurt am Jain [ID:nL4E8E82ZB] - For previous columns by the authors, Reuters customers can click on [HAY/] and [LARSEN/]
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