It seems Deutsche Bank's banking analysts were onto something. Earlier this month, they suggested that things were looking up for Barclays. As if on cue, Barclays CEO Jes Staley today told reporters at Davos that - the non-core unit aside - Barclays is "done with massive layoffs." Simultaneously, there are reports that the bottom 20% of performers in the front office at Deutsche are at risk of redundancy this week and next.
Historically, Deutsche Bank and Barclays were not dissimilar in terms of their business structures: both built investment banks skewed towards fixed income trading; both have tried to diversify into other areas. So why - for the moment - has Barclays come out on top?
While both Deutsche and Barclays implemented hiring freezes last year, only one of the two was successful.
Barclays no longer breaks out headcount in its investment bank, but in September 2016, CEO Jes Staley said the bank had eliminated 13,600 jobs since he arrived - largely as a result of failing to fill spaces left by people who left. This followed 1,000 job cuts at Barclays' investment bank in January 2016, when 230 jobs went in Asia.
Deutsche, on the other, hand has struggled to cut staff in its global markets division. As the chart below shows, the business ended the third quarter of 2016 with 922 people more than it had at the start of 2015. As fast as Deutsche cut staff in the front office, it added even more in the back.
Cryan is resolving a legacy problem at Deutsche Bank. As the chart below from J.P. Morgan's analysts shows, Deutsche abjectly failed to cut compensation expenses across the bank in line with plummeting returns to shareholders between 2007 and 2015. Deustche's combined corporate banking and securities business (CB&S) and non-core operations units (NCOU), either made zero profits or a loss between 2012 and 2015, while compensation and benefit spending barely budged.
Barclays no longer breaks out compensation in its investment bank, making it difficult to gauge cuts to pay. However, overall costs in Barclays investment bank rose as a percentage of revenues in the first nine months of 2016 - from 69% in 2015 to 73% a year later, suggesting the British bank can't afford to be complacent.
Deutsche Bank's stubborn pay costs
Since acquiring Lehman's U.S. operations in 2008, Barclays is closer to the model of a diversified investment bank. Deutsche, however, is still heavily skewed towards fixed income trading. This might be good news as fixed income trading picks up in 2017, but most banks have tried reducing their reliance on capital-hungry fixed income businesses and Deutsche is no exception. Deutsche CEO John Cryan has said repetitively that he wants to build its investment banking division (IBD) in the Americas. - Guess who won't be getting fired...
Lastly, Deutsche has agreed to pay fines totaling $7.2bn for its transgressions before the financial crisis. Barclays, however, has refused to pay anything for the moment. The British bank is said to be willing to pay up to $2bn and there were reports that the DOJ wanted to double that amount.
While Deutsche's settlement is a lot less than the $14bn originally requested, it's still higher than the $6.3bn in litigation reserves Deutsche had accrued by the end of last year. Deutsche needs to find money. Barclays - for the moment - does not. This doesn't mean Barclays will be hiring, though. Staley said, “It’ll be nice to run the bank status quo for a while.” In other words, the hiring freeze remains.