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CommentP&M Notebook

P&M notebook: Who’s actually made money?

Pity the poor bank analyst (or journalist) trying to make sense of the third quarter reporting season. If you see your research guy, maybe buy them a beer.

Deutsche Bank and Barclays both reported on Thursday, as did Santander. BNP Paribas and Royal Bank of Scotland followed on Friday, while HSBC and Commerz joined in on Monday.

The hard part is unpicking all of the exceptional items to figure out who is actually making money, and in what businesses?

Investor relations teams at banks are like squid — when the business is under threat, they throw out a cloud of ink as a defence mechanism, in the form of one-off exceptional items, recategorisations, and rebasing.

Try explaining to someone outside finance or accounting how Deutsche Bank can book a €6bn loss (without losing any actual money), or how adopting a “prudent” valuation (compared to what?) can cost €1.3bn.

So were Deutsche's results good or bad? Most of the big stuff had already been trailed — the loss which wasn’t a loss, the dividend stoppage, the reorganisation of the bank and purge of Anshu Jain allies — but the new part is the scale of the job losses running to around a quarter of the bank's staff if you include the Postbank spin-off.

The cuts fall most heavily on the bank’s army of technology consultants and back office staff, with some of the external functions taken in-house, and some cut entirely. Meanwhile, Deutsche plans a total overhaul of its technology infrastructure, in the hope that the trading businesses, in particular, can work together in harmony.

It’s an open question whether having IT people around would help or hinder such a transformation, but Cryan has made his views clear.

The conduct crunch

In the front office, Deutsche is shutting up shop in a few businesses — large ones which have looked expensive for years, such as uncleared credit default swaps, uncleared interdealer interest rate swaps, low rated securitization trading, and agency RMBS trading.

It’s also closing offices in 10 countries, but headlines about a “global retreat” are a little premature — do you need an office in every single country to cover its largest companies? There’s no sense that Deutsche is pulling out of corporate finance, or that Cryan has ambitions to be anything other than top of the class.

High profile hires like Jeff Urwin, now head of banking, and Karl Altenburg, co-head of corporate finance EMEA, do not exactly look like leading indicators of a corporate finance pullback.

But the bank is still one of the most troubled. It’s not so much that business isn’t good, or it’s not topping the league tables. Deutsche kicked ass in fixed income, reporting a 20% increase in revenue while the US banks were all down double digits. DCM, which has been in the doldrums on the back of low LBO activity, also delivered growth, up 5%.

Instead, it’s its conduct which seems to be the problem with 12 pages of lawsuits and investigations covering almost every area of the bank in the the quarter's results. Investment banks still report them as exceptional items, but they are becoming a regular feature.

That was the main nastiness for RBS as well. It took another £129m of litigation and conduct provisions, pushing its total provision up to £4.5bn, and the bank's management still had to give a steer that it isn’t over, not by a long way.

That said, RBS is turning into an equity capital markets story rather than a commentary on the state of the investment banking industry. It has just £35m left in the “banking” revenue line within CIB this quarter. That kind of money is smaller some individual deals these days — Bank of America Merrill Lynch’s fee for advising Shell on the BG acquisition, or the underwriting for Santander’s accelerated bookbuild for example.

Percentage drops across the investment bank, though, were truly ugly. Rates was down 14%, currencies down 30%, and credit down 68%. It’s a measure of just how little the market cares about what remains of RBS’s investment bank that the shares were only down 1.2%. The stuff that matters, UK retail and corporate banking, did fine.

The bank also sold another foreign business, selling an Indian loan book to NBAD.

Barclays' wishful thinking

At Barclays, things are a little simpler — the first round of restructuring and soul searching has already happened, and the bank’s conscious approach of clearing and settling litigation early might eventually benefit the bank’s shares.

Still, the market didn’t love Thursday’s number, with a 3% price drop at the open.

Investec analyst Ian Gordon described them as “outstanding”, but there was precious little on how the bank will handle ring-fencing, only a light sketch of the bank's strategy to meet the Total Loss Absorbing Capacity requirements, and nothing but wishful thinking in new chief executive Jes Staley’s letter to staff.

The investment bank, though, looked pretty strong. There were Improvements in macro revenue and equity trading, a 20% jump in banking revenue, and the best quarter for advisory since 2011. Only credit was down, with securitized products and distressed debt hurt by market volatility.

Nomura also reported last week, filing a dismal 43% drop in bond underwriting and distribution, a 61% drop in profit to a super skinny ¥8.6bn (€64.75m). The bank has been cost cutting in Europe, with job losses in DCM, banking, syndicate and trading, but in Asia ex-Japan, it has brought former Credit Suisse banker Alister Moss back into the market as head of DCM.

GlobalCapital has also been thinking carefully about the high yield market — specifically, about the power of the left lead.

The market is dominated by a few banks with big leveraged finance books, extensive sponsor coverage and the lion’s share of left lead roles. Other banks share the bookrunner roles but precious little control of the process. Naturally, these institutions want a chance at the juicier fees to be had on the left, and wish the market would start to look more like that for investment grade corporates.

Banks outside the magic circle are investing in the business, clearly hoping for a flatter playing field. HSBC poached two bankers from Deutsche for its leveraged finance division, while ING has a new project to build a European high yield business.

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