A year is a long time in investment bank restructuring, and might represent the difference between gambling on resurrection and dwindling into obscurity.
That, at least, is one lesson from the divergent paths taken by Barclays and Deutsche Bank, Europe’s best two shots at a fixed-income-led global investment bank.
Around 2014 and 2015, both firms were under major pressure. Both survived the financial crisis without a state rescue, thanks in part to Qatari state.
But regulation pushed up capital requirements, cut volumes, and rendered several previously attractive corners of fixed income trading unprofitable. Balance sheets could no longer expand indefinitely to take advantage of arbitrage opportunities. Derivatives had to be collateralised, and therefore, funded. Clients clustered around the most liquid, low margin products and showed less appetite for lucrative funkily structured products.
So Barclays and Deutsche Bank ended up launched restructuring programmes that seemed similar.
Both created internal bad banks, into which went long dated structured credit, complex credit and correlation, and a grab bag of exotic lending or special situation exposures. Barclays, for example, had a book of debt consolidation mortgages, and some distressed local authority exposures. Deutsche's featured a Las Vegas casino and a Canadian port terminal.
In their core businesses, both firms cut leverage, cut risk-weighted assets, and cut costs with big redundancy programmes skewed towards both senior staff and countries with weaker union representation.
Barclays started earlier though, donning its hair-shirt under Antony Jenkins, who took over in 2012 after Bob Diamond was forced out over the Libor scandal. Deutsche Bank made several false starts to its turnaround. It may have started in earnest in 2014, with an €8.5bn capital raise to reinforce its “Strategy 2015+”, but one could also date it to 2015, when Anshu Jain was forced out and John Cryan took over.
Timing made all the difference. Barclays is now in full expansion mode, hiring managing directors from top flight American banks across banking and markets, and adding leverage to secure the opportunities on offer in financing and repo. It’s trumpeting the strength of the US business it pulled out of the wreckage of Lehman Brothers and is strutting its stuff as a transatlantic operation.
Deutsche is doing almost the exact opposite. It forced out Cryan and placed the bank in the hands of Christian Sewing, who has overseen a vigorous set of cuts in the last quarter, targeting repo and prime finance, as well as the US rates trading business — the very same businesses Barclays now sees as imperative to throw capital at.
It’s not that Deutsche is short of capital, given last year’s rights issue, but more that it sees opportunities elsewhere.
What can opposites attract?
Can both banks, with opposite strategies but starting from similar places, be right about the future for financing and markets?
One bank’s loss is their competitors’ opportunity. As Deutsche sheds assets and clients, that creates more space for Barclays to grab market share.
Deutsche did make it clear that it has mostly shed its less profitable clients, and made up on pricing what it lost on volume but it doesn’t necessarily follow that those same clients wouldn’t be profitable for Barclays.
The firms also have very different backdrops from which to approach their restructurings. They may once have had similar fixed income businesses, but these were paired with starkly different collections of other activities.
Elsewhere in banking, Deutsche has a huge transaction services business, attracting corporate deposits and threatening to swamp its investment banking revenues. Barclays, meanwhile, has a top flight US corporate finance business, with a European presence that is still less than a decade old, having started its buildout in 2009. Deutsche has a German retail bank with skinny margins. Barclays has a cash spawning credit card monster called Barclaycard.
The market backdrop has been less kind to Deutsche’s group of businesses, meaning the German firm has deeper cuts and bigger changes to make. Barclays has an activist shareholder trying to have the investment bank spun off (although a few decent quarters should take the steam out of those demands).
Barclays’ management, now heavily dominated by Jes Staley’s ex-JP Morgan colleagues, may take a more glass half-full view of the market, while Deutsche’s team, thinner on the ground after the post-Cryan clear-out, might be understandably pessimistic. Different firms have different views about the future — financial markets depend on it.
But still, none of this quite gets to the heart of the matter — both banks have fixed income and prime finance businesses which are large enough to survive and compete globally, see similar volumes and trends, similar client flows and toil under similar regulatory regimes.
How can one bank see it as attractive enough to add another £50bn of leverage exposure, while the other cuts a similarly vast sum from its leverage? Even if their views diverge, surely they can’t be $100bn apart.
The difference has to lie in ambition. Financing and repo might be decent businesses in their own right, today — Barclays certainly believes they are — but more than that, they’re an essential support for a full markets ecosystem.
Prime finance profitability is one consideration for Deutsche, but the extent to which it supports a fully operational equities business is another entirely. Active repo desks help the rest of a fixed income business finance itself, support the rest of the rates businesses, and win primary market bond mandates from sovereigns and supranationals.
So the difference between the two banks comes down to this: how much do they want a fully fledged investment bank?