Deutsche Bank AG and Barclays Plc, two of Europe’s biggest lenders, may have trouble meeting their targets even if they improve investment-banking revenue by 50 percent this year, according to analysts at Goldman Sachs Group Inc.
Deutsche Bank would struggle to reach a return on tangible equity of 10 percent this year even if investment-bank revenue matches the pre-crisis levels of 2006, while Barclays is in a similar position, analysts led by Jernej Omahen wrote in a note to clients.
Deutsche Bank Chief Executive Officer John Cryan and Jes Staley, his counterpart at Barclays, have both strained to make more money from trading and investment banking since they took control of their lenders more than two years ago. While the return of volatility to markets this year is likely to improve revenue, the CEOs continue to grapple with the impact of post-crisis regulations and shrinking balance sheets, analysts wrote.
Achieving meaningful returns “seems challenging” for both Frankfurt-based Deutsche Bank and London-based Barclays, “even in a supportive revenue environment,” the analysts wrote. “Regulation, balance sheet and business cuts have lowered the RoTE ceiling.”
Swiss lenders Credit Suisse Group AG and UBS Group AG “are in a better place” by comparison, the analysts wrote.
Cost of Equity
At Deutsche Bank, Cryan has targeted a post-tax return on tangible equity, or RoTE, of more than 10 percent by 2018. The measure for the firm overall was minus 0.9 percent for all of last year, as revenues fell at the corporate and investment bank division while costs crept upwards.
Staley said last year that Barclays’s cost of equity, the minimum return investors demand from the business, is about 10 percent, meaning the investment bank needs to generate an ROE in excess of that to justify its existence. RoTE at the corporate and investment bank fell to 5.9 percent in the third quarter, while the measure was 18.4 percent at the British retail and cards unit.
Goldman Sachs has a hold rating on Deutsche Bank shares and recommends investors sell Barclays stock. The firm has a buy rating on Credit Suisse and a hold rating on UBS.
A sudden plunge in the value of U.S. stocks after they hit a record high Feb. 2 brought an end to a years-long slump in market volatility, the moves in asset prices that traders crave. That increased activity and client engagement in the markets may help increase first-quarter investment-bank revenue by as much as 10 percent compared with the same period in 2017, the analysts wrote. Equities trading should benefit from the swings in prices, while fixed-income trading should also gain from the “emergence of clearer trends.”
“The quarter (let alone year) is still young – but the trading environment is better,” the analysts wrote.