Investment banking: As Barclays cuts FICC, Deutsche invests

Peter Lee
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Barclays cuts its investment bank in half; Deutsche raises equity to protect market share.

The two leading European banks in the global fixed-income markets, Deutsche Bank and Barclays, took divergent steps last month after announcing disappointing first-quarter results driven by hits to FICC revenues. 

FICC revenues drove earnings mightily at these two banks in the era of balance-sheet expansion and easy leverage, but like all banks they have struggled to adjust to a new era of punitively high capital requirements cratering returns on retained market and counterparty credit risk.

The immediate outlook remains dire. Deutsche Bank said in mid-May that, halfway through the second quarter, investment banking revenues look as if they might be lower than in the comparable quarter of 2013 by a similar or even greater magnitude than the year-on-year decline in the first quarter of 2014. 

At Barclays, Tushar Morzaria, group finance director, says: "April was a month for us in which we saw weakness from the first quarter persist."

With regulators and investors focusing on the two banks’ poor leverage ratios, the pressure was increasing on them to do something. The uncertainty was itself becoming destabilizing. 

An older generation of Barclays investment bankers, including many that had joined during the acquisition of Lehman Brothers, began hitting the exits. At Deutsche Bank, the share price fell from €39 at the start of the year to just over €30 in May.


Each bank has now set out medium-term plans to achieve a 12% return on equity by 2016. But they will travel to that destination along very different roads.

Barclays went first. On May 8, chief executive Antony Jenkins told many outside the bank exactly what they wanted to hear: that he would rebalance Barclays by cutting back the markets businesses heavily. 

"The investment bank is too exposed to volatility in FICC and the [Barclays] Group is too exposed to volatility in the investment bank," he said. 

Anshu Jain and Antony Jenkins: different strategies 
Anshu Jain and Antony Jenkins: 
different strategies

In the next two years, Barclays will cut leverage exposure at the investment bank in half, with its risk-weighted assets falling from £222 billion ($375 billion) in 2013 to £120 billion in 2016, with £90 billion of those immediately transferred into a new non-core unit to be run down. 

Barclays will cut the proportion of group equity capital allocated to the investment bank from 51% to 28% and undertake that it will not grow above 30%. Fully 7,000 jobs will be cut in the investment bank, split roughly equally between front and back office.

Jenkins insisted that this major surgery was essential on the group’s signature business, the only one in which Barclays is a global leader. "It [the investment bank] consumes too much capital; it does not generate sufficient returns for shareholders; and it is too large as a proportion of the group. As currently constituted, it is an unacceptable drag on group returns." 

In place of the global ambitions once harboured by Bob Diamond and John Varley, Jenkins set new and more modest expectations: "In the future, Barclays will be a focused international bank."

Over at Deutsche Bank, co-CEO Anshu Jain doesn’t do modest expectations. On a Sunday evening 10 days after Barclays had announced its radical rebalancing, Deutsche Bank announced an €8 billion equity capital raising. 

It has brought in €1.75 billion from shares placed at a price of €29.20 to Paramount Holdings Services, a vehicle of the Qatari royal family – an echo there of Barclays’ highly controversial capital raising back at the height of the financial crisis in 2008 – which will be an anchor investor committed to take up all of its entitlement in a fully underwritten €6.3 billion rights issue expected to close at the end of this month.

Jain struck a bullish tone, apparently emboldened by the retreat of Barclays and others. "We are now the only true global universal bank based in Europe," he said. "These actions are not a recalibration of our strategy, they are a reinforcement of our strategy." 

He talked up Deutsche’s intentions to seize "the opportunities we see from the dramatic shift in competitive dynamics here in Europe and from a number of mega trends that are quite substantial".


Long seen as a capital laggard, with a common equity tier 1 ratio of just 6% two years ago, Deutsche had taken that to 9.5% on the eve of the latest rights offering. Once the deal is completed it will boost Deutsche’s fully loaded CRD IV common equity tier 1 ratio to 11.8%. 

"Deutsche Bank is now in a comfortable capital position," notes Kian Abouhossein, analyst at JPMorgan. "Co-CEO Anshu Jain is putting Deutsche Bank on the right track."

That extra capital gives Deutsche enough breathing room to absorb higher than expected litigation costs – most analysts have raised expectations on provisions against such hits towards €2.5 billion for this year from €1.9 billion previously, following the bank’s guidance – with a sizeable buffer to protect against further unforeseen regulatory demands that might follow the European Central Bank’s asset quality review and some capacity left over to invest in growth.