Deutsche and Barclays Feel the Investment Bank Burn

By Max Colchester and Jenny Strasburg Features Dow Jones Newswires

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 still seem foggy on the CEOs' vision.

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Both big European banks said Thursday they suffered 30% slumps in trading revenue in the third quarter, a disappointing result even considering the historically low market volatility. On average U.S. banks' trading revenues dropped half that amount this quarter.

Barclays shares slumped 6% in afternoon trading Thursday. Deutsche Bank's were down 1.8%. 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.

Two of Europe's marquee banks have already gone through dramatic overhauls. At Barclays, Mr. Staley implemented a plan to ditch billions of dollars in assets, exit over a dozen countries and cut 60,000 staff. At Deutsche Bank, Mr. Cryan has also axed clients, business lines and thousands of staff, settled big regulatory probes and is planning to list part of the German bank's asset management business.

However investors still don't see how much the big changes will ultimately pay off, or when.

While Europe's economic rebound is helping fuel retail and corporate banking business, analysts still question whether European investment banks have the muscle to take on their U.S. rivals. Deutsche Bank and Barclays are the world's sixth and seventh largest investment banks by revenue, according to data by Coalition.

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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 growing increasingly 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 the recent hire of around 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 some fixed-income business back, but investors say it's not enough yet.

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 only met its cost of equity twice in the last 20 years. But it's 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 ongoing 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're having to manage massive 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 26, 2017 09:44 ET (13:44 GMT)