Trading places

When Germans take on Brits at soccer, the Germans tend to win. Not so for the countries’ largest investment banks in the first quarter of the year. Yet Deutsche Bank and Barclays’ fortunes could yet converge.

Income in Deutsche’s vaunted investment bank fell 11 per cent year-on-year, while at Barclays it rose three per cent. The difference in the two banks’ flagship fixed income, currencies and commodities arms was even more marked: Barclays increased its FICC income by nine per cent compared to the first quarter of 2011, while Deutsche’s shrank by eight per cent — though the German bank’s unit is still significantly larger.

Barclays says its victory came from increasing volumes through its powerful trading machine rather than the market rally pushing up the inventory of its assets. But another factor is Deutsche’s deleveraging. The German lender’s overall risk-weighted assets (RWAs) fell three per cent from December to March, while Barclays’ RWAs were up one per cent.

The banks also have different attitudes to risk: Deutsche’s daily average value at risk in the first quarter was ^55 million — down about a third from the same period of 2011. Though Barclays doesn’t disclose the figure on a quarterly basis, its VAR was down just five per cent year-on-year.

Both banks still face big capital challenges, though. If Basel-III rules were fully in force, Deutsche’s RWAs would be a third higher by January 2013, and the bank’s core Tier-I capital ratio under the new rules would be just 20 basis points above the regulatory minimum of seven per cent. Barclays is in better shape — its 10.9 per cent core Tier-I ratio would slip to just over nine per cent if Basel-III RWA inflation is factored in. But it will also probably have to clear a higher capital bar than its German counterpart. The UK’s Independent Commission on Banking wants UK banks to hold at least 10 per cent core Tier-I ratio, with seven percentage points of loss-absorbing debt or equity on top.

Despite Barclays’ stronger first quarter, investors still seem to have more confidence in Deutsche: the German group trades at 0.8 times Espirito Santo’s estimated full-year tangible net asset value, compared to Barclays’ 0.5 times. That probably reflects greater UK regulatory uncertainty. But given both banks exposure to reviving euro zone troubles, the ultimate results in 2012 could be a no-score draw.