Fri | Dec 9, 2016

Time for a radical rethink at Barclays and Deutsche Bank

Published:Wednesday | January 28, 2015 | 12:00 AMBy Patrick Jenkins
File A view of Barclays headquarters at London's Canary Wharf financial district.

The idea of breaking up big banks is in the wind again. Ever since the 2008 crash, there has been a succession of proposals from regulators keen to solve the problem of institutions being "too big to fail".

This month analysts at Goldman Sachs joined the campaign, arguing that JPMorgan should be broken up.

They took their cue from regulators at the Federal Reserve who, in December, identified a $22 billion capital shortfall at JPMorgan, which must be closed by 2019 - a charge, essentially, on the bank's scale and complexity.

Pressure is mounting in Europe, too, though the impetus for meaningful change remains halfhearted. Banks in Britain are shuffling towards compliance with 2019 ringfencing rules designed to insulate their high-street banking operations from riskier investment banking. Broader EU plans for structural reforms are stalled.

Why aren't shareholders making more of a fuss? It is one thing for Jamie Dimon, JPMorgan's feisty chief executive, to palm off the pressure - the bank generated a semi- respectable return on equity last year of close to 10 per cent. It is quite another for Europe's universal banks - which house retail and investment banking under one roof - to resist change, given their woeful returns. Barclays and Deutsche Bank had ROEs of 3-4 per cent at the last count.

At both institutions, there are hints of acceptance that strategic rethinks may be needed.

A few weeks ago, Anshu Jain, the investment banker who is Deutsche's co-chief executive, announced that a review had begun into the future of its post office unit Postbank. It is more than six years since Deutsche began a process of incrementally acquiring more than 90 per cent of the business. Costs have since been cut and profitability improved. But the synergies have been limited. Postbank's operations are situated in post offices, making rationalisation with Deutsche's high-street outlets impossible. Worse, the hoped-for fluidity of funding between Postbank and the Deutsche group has been stymied by regulators. And, as a clincher, Postbank inflates Deutsche's balance sheet by €155 billion - inconvenient when it is one of the weaker European banks under the increasingly popular leverage metric that compares capital with total assets. A resale of Postbank looks logical.

Around the same time that Mr Jain began pondering the future of Postbank, Antony Jenkins, Barclays' boss, was angling in the opposite direction, unsettling his own investment bankers in the process. In an interview with the Financial Times in December, he went as far as to say: "The universal banking model is dead."

Over the past couple of decades, there have been few banking rivalries as arch as that between Barclays and Deutsche. More recently, scandal, regulation, plunging profitability and changes of leadership have led to a tentative bifurcation of approaches.

But why not stop the toying? Here is an opportunity for a radical solution: a vast asset swap to turn Deutsche into a pure-play investment bank and Barclays into a retail bank.

Deutsche - reborn as a broker-dealer in the vein of a European Goldman Sachs - would be based in probably the only European home market that would tolerate it. It would be able to strip out staff, overheads and capacity, and offset the industry's shrunken profit margins.

Barclays, by contrast, would become a leading force in retail banking across the two biggest, healthiest economies in Europe, and avoid the costly UK ringfencing rules.

The idea sounds grand - fanciful, even. But with both banks struggling, and unrelenting pressure to raise equity levels compounding the hit to already weak ROE numbers, now may be the moment to think grand, fanciful thoughts.

There are, of course, plenty of reasons why a Deutsche-Barclays asset swap would be tricky. Both banks may be reluctant to ditch their universal service offering; the funding benefits of combining retail and investment banking would be lost; and regulators might blanch.

But it is just the kind of radical rethink that investors should be asking of the world's banks. Policy makers seem inclined to only go so far: requiring higher capital levels and more onerous safety nets. It will be up to investors to finish the job and demand fundamental changes that can revive the prospects of a beaten-up industry.

patrick.jenkins@ft.com

(c) The Financial Times Limited 2015