Barclays and Deutsche Bank Experience FICC Pain

By Mani
Updated on

Barclays PLC (NYSE:BCS) (LON:BARC)’ second-quarter drop in FICC revenues by 22 percent year-on-year is only temporary, according to Citi Research in a recent report.

Andrew Coombs and team at Citi Research forecast a rebound in Barclays PLC (NYSE:BCS) (LON:BARC) FICC revenue to £6.22 billion in 2014, as the analysts don’t anticipate the 2Q and 3Q 2013 rate environment to prevail in 2014.

FICC performance screens poorly on leverage

Citi analysts observe Barclays PLC (NYSE:BCS) (LON:BARC) reporting weak second quarter drop in FICC is accentuated by Barclays’ recent update that July-to-August IB revenues were also £0.5 billion lower year-on-year, with weak FICC only part offset by growth in equities and prime services.

Andrew Coombs and team point out Barclays’ recent poor performance on the FICC front evoked considerable attention as the regulator’s recent shift in focus towards leverage ratios has placed further scrutiny on this business. As FICC business is balance sheet intensive, this screens poorly on leverage relative to other parts of the Group.

The analysts note in 2012, Barclays PLC (NYSE:BCS) (LON:BARC)’ investment bank accounted for 41 percent of Group revenue, while it accounted for 54 percent and 56 percent in terms of PBT and RWAs. The following graph illustrates the predominant position that IB enjoys within Barclays:

IB's predominance in Barclays


Citi analysts point out that by product, Barclays’ IB revenue mix is weighted towards FICC with a dominant share of 62 percent, as evidenced from the following graph:

FICC Share

Reasons for poor FICC performance

Dwelling deep into the reasons for Barclays’ poor performance on FICC front, Citi analysts point out the poor performance in 2Q and 3Q of 2013 can be attributed to legacy IB assets, which are in the process of run-down and the prospect of Fed tapering leading to a rising-rate environment in the U.S and Europe.

Barclays looks less aggressive than Deutsche

Citi analysts note bears have suggested that forced deleveraging could result in a permanent loss of FICC market share for Barclays over time. However, Andrew Coombs and team at Citi Research don’t subscribe to this view.

Instead, they point out Barclays PLC (NYSE:BCS) (LON:BARC) is targeting asset reduction of only about £65 to £80 billion over the next 12 months. However, this doesn’t look aggressive when compared with Deutsche’s €200 to €300 billion target over the next 30 months.

Interestingly, earlier today, Deutsche Bank’s co-Chief Executive Anshu Jain has warned that third-quarter investment banking revenue for the Europe’s largest bank would be significantly lower than a year ago. JP Morgan analysts anticipate Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB)’s third-quarter revenue from FICC could fall 31 percent on the year to €1.6 billion ($2.2 billion).

Andrew Coombs and team at Citi Research in their recent report have cut 2013-15E underlying PBT for Barclays PLC (NYSE:BCS) (LON:BARC) citing weaker FICC revenues. However, as the analysts consider the weakness as an industry-wide issue, they don’t see sufficient evidence to suggest Barclays is losing share in its FICC franchise and retained their Buy rating on Barclays.

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