Barclays, Deutsche Bank Fight to Lift Profit Just Got Harder

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  • Barclays to accelerate its focus on `core strengths'
  • Turmoil in markets threatens revenue, carries into 2016

A revenue slump is adding urgency to cost cutting at Barclays Plc and Deutsche Bank AG, where new chief executive officers are racing to raise profitability.

Barclays said Thursday it’s accelerating a plan to focus on “core strengths and running the business for returns,” while shutting offices in nine countries. Deutsche Bank, based in Frankfurt, said Wednesday that revenue dropped about 16 percent in the fourth quarter from a year earlier, driven by its securities unit, Europe’s largest.

The volatility that affected trading at the end of last year carried into 2016 as doubts about growth in China persisted and the selloff in crude oil deepened. Europe’s biggest investment banks, which saw profitability shrink as regulators tightened capital standards, now face increased pressure on revenue.

“The environment worsened in the fourth quarter from the third and investors are asking themselves whether that’s the start of a trend,” said Michael Huenseler, who helps manage 17.4 billion euros ($18.8 billion) at Assenagon Asset Management in Munich. “If that’s the case, it would suggest that those banks who are taking the most radical action on cutting back their trading businesses are on the right track.”

While Barclays said revenue at its investment bank, led by Tom King, was “broadly flat” in 2015 from the previous year, that implies that the unit’s income in the fourth quarter fell 11 percent. Deutsche Bank cited “challenging market conditions” for its fourth-quarter slump.

The comments suggest European securities firms are set to report a deeper decline in revenue than their competitors in the U.S. The five biggest U.S. firms saw their combined revenue from investment banking and trading fall 4.9 percent to $24.2 billion in the fourth quarter from a year earlier, data compiled by Bloomberg show.

Deutsche Bank may have had a “decent” performance in foreign exchange and rates trading in the fourth quarter that still couldn’t make up for “challenging” revenues in credit, high-yield debt, leveraged lending and emerging markets trading, UBS Group AG analyst Daniele Brupbacher wrote in a note to clients.

Slumping Shares

Bank shares have been hit by concern that China’s economy is slowing and that the fallout from a drop in commodity prices will erode corporate profits. The 46-company Stoxx Europe 600 Banks Index has fallen 14 percent this year. Deutsche Bank dropped 23 percent while Barclays declined 14 percent.

European bank shares are being undermined by concern over the industry’s profit sustainability, John Cryan, Deutsche Bank’s co-CEO, told reporters at the World Economic Forum in Davos, Switzerland on Wednesday. Markets may see current levels of volatility for years to come unless “we see active investment picking up,” he said.

“The history of banks is to be too thinly capitalized, to be too leveraged in a very volatile business and that’s not a great recipe,” Credit Suisse Group AG CEO Tidjane Thiam said in a Bloomberg TV interview in Davos on Friday. “All the banks, and we at Credit Suisse, are working very hard to change that business model so that we bring it back to less volatility. But we’re not there yet, that’s a two, three-year journey.”

Credit Suisse laid out plans in October to cut as many as 5,600 jobs and focus more on wealth management, while shrinking and splitting up the investment bank.

Deutsche Bank is eliminating about 9,000 jobs on a net basis by 2018. While the company hasn’t broken out the number of positions that will go at its securities unit, the businesses it plans to shrink or close are mainly in its capital-intensive fixed-income trading arm.

Asia Pullback

Barclays CEO Jes Staley started a fresh round of cuts at the investment bank that will eliminate 1,200 jobs worldwide and shut securities operations across Asia, people with knowledge of the matter said this week. The biggest cuts at the London-based bank will fall in the Asia-Pacific region, and include winding up the cash equities business, said the people, who asked not to be identified because the decision isn’t public.

Credit Suisse views the retreat of its competitors in some emerging markets as an opportunity to expand, according to Thiam. “When others are retrenching, suddenly teams who would never have talked to us, talk to us because others are leaving the region,” he said.

U.S. banks are also trimming. Morgan Stanley eliminated about 1,200 employees last quarter, including about a quarter of the fixed-income trading staff, a person briefed on the matter said. Bank of America Corp., which cut more than 10,000 jobs last year, will reduce staffing in 2016 to trim costs amid declining revenue, CEO Brian Moynihan said in a Bloomberg TV interview in Davos.

“Universal banks are nearly all coming to the same conclusion,” said Sandy Chen, an analyst at Cenkos Securities Plc in London. “When you’re allocating assets, investment banking is the lowest return business in terms of return on capital.”