Cost control gives Barclays an edge over Deutsche Bank

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Cost control gives Barclays an edge over Deutsche Bank
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Investors suspect that both will struggle to maintain their results

Barclays offers better protection against a price drop than Deutsche Bank, thanks to its greater efficiency.

The sharp reduction in provisions and the good results of both respective investment banks helped them to recover from the plummet of the pandemic. Although Deutsche’s fixed income unit’s second-quarter revenue was down 11% from the same period last year, it held up better than its Wall Street rivals. Meanwhile, the increase in advisory fees raised the quarterly profit before taxes of investment banking to 1,000 million, 7% more than in the same period of the previous year. The story is similar at Barclays, where the boom in merger fees offset less frenzied trading in bonds and stocks.

The good results led Deutsche to abandon its goal of limiting costs to $ 16.7 billion in 2022: it will limit expenses to 70% of revenue. This indicates renewed confidence that the change in course is bearing fruit. And it gives you more room to raise the salary of the bankers who bring in the most business.

You will need a lot more income. Assuming the analysts’ cost projections are correct, you need to generate $ 25.6 billion in revenue in 2022 to hit the efficiency target and exceed your ROTE threshold of 8% – $ 2 billion more in revenue than analysts expect. As activity in the markets normalizes, this optimism may turn out to be wrong.

Barclays believes that projected costs of around € 16.3 billion this year should remain relatively constant. That gives you a cushion: Even if 2022 revenue holds steady against the 25,000 analysts are expecting this year, you can still earn a 10% ROTE.

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Deutsche is trading 55% below tangible book value, and Barclays 38%, suggesting investors suspect both will struggle to maintain their numbers. If revenues disappoint, Barclays will have a cost control advantage.