European Banks: Board Games

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What's going on?

Although both banks reported improving quarterly results, the UK’s Barclays climbed the share price ladder on Wednesday – while Deutsche Bank slid down the snake.

What does this mean?

Barclays’ leadership has been under pressure from activist investors to improve financial returns recently – and it reportedly considered merging with rival Standard Chartered in May. Activists want a move away from less profitable businesses like stock and bond trading, but the CEO has resisted – with some justification, as the division grew profit 19% versus the same time last year even as several US rivals struggled.

Deutsche has had troubles of its own: it switched CEOs in April after making a loss in each of the last three years. Profit fell by 60% last quarter – but that was still better than predicted, as cost cuts began to take effect. Deutsche’s results were also helped by its new CEO’s focus on commercial banking (where revenue fell 5% vs. investment banking’s 13%) – something investors regard as no trivial pursuit.

Why should I care?

For markets: European banks are scrabbling to keep up.

Although it didn’t do what all shareholders wanted, Barclays shares rose 3% on Wednesday. But Deutsche, despite exceeding profit expectations, saw its shares fall 5% – most likely because its revenue performance wasn’t quite up to scratch. Both firms are now starting to deliver strategically, however – and European banks could gain ground on their US rivals if interest rates rise higher in the eurozone.

The bigger picture: Being the big buckaroo still counts in banking.

The pressure is on for European banks. Heightened regulation adds costs and reduces revenues, while US competitors are performing well – and headcount is getting a haircut to balance the books. For banks like Deutsche, there’s a risk that too much downsizing could lead its market share to go kerplunk. Future revenue is therefore key for investors: any uptick in sales at a slimmed-down operation is likely to feed straight into increased profit.

Originally posted as part of the Finimize daily email.

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