Barclays and Deutsche top and tail bank sentiment

Summary

Barclays’ and Deutsche Bank’s post-earnings share divergence could last.

Barclays up, Deutsche down

The British bank’s stock has traded about 3% higher for a large chunk of Wednesday’s session. Shares in Germany’s largest lender by assets have mostly been down by around the same amount. This divergence comes in a year of negative price returns for both, though the German bank’s 41% tumble over 2018 by Tuesday’s close is around double Barclays’ 18% fall. $1.7 trillion-asset Deutsche has solidified chances of an 8^th annual share price fall out of 12 and its UK rival could still be on course to match that tally. Even so, their shares point to more optimism on Barclays.

Beyond ‘one-offs’

Barclays’s third quarter came with the usual layer of ‘one-offs’, including legal costs and misconduct fines, though those have been receding this year. That allowed all important return on tangible equity to jump 9.4% in the quarter to the end of September from just 5.1% in the same period a year earlier. (And 10.2% if one-off charges are excluded). Underlying profits before tax of £1.6bn were comfortably above the £1.33bn large investors pencilled in.  Investors also rewarded the bank for getting on the right side of financial market volatility. Trading income rose 19% in the quarter, though costs for those higher profits rose too. Still, Q3 marks the second consecutive quarter in which Barclays’ markets businesses has outshone trading operations at dominant U.S. banks, including JPMorgan. Falling legal and conduct costs and returns on equity tracking near the 10% level needed for sustainable profits appear to set Barclays on a more promising path than Deutsche.

Deutsche confidence isn’t contagious

True, the key takeaway from Deutsche’s report was that management confidence has improved enough for the group to forecast its first annual profit in three. Problem is, investors expected that profitability to commence in Q3. Instead, restructuring costs, the consequences of failing a U.S. stress test, and the seemingly interminable process of right-sizing assets pulled net profits 65% lower to €229m and revenues down 9% to €6.175bn. Throw in Deutsche’s still-considerable and unprofitable fixed-income trading—a business most large banks stumbled on over the quarter—and quarterly return on tangible equity deteriorated to 1.6% from 4.5% in Q3 2017. Consensus flags just 1.4% statutory returns ‘attributable’ to shareholders this financial year for Deutsche compared to a European average of about 10%, and 5% for Barclays. With trade conflicts set to accelerate a darkening global economy in months ahead, it’s unlikely any giant bank’s shares will be spared entirely. Still, the first key lenders to report in the southern hemisphere offer a fairly easy choice for investors.