Deutsche surprise edged by Barclays 8217 lucky timing

Barclays edges ahead of Deutsche Bank in our view, on a solid quarterly performance, despite noisy exceptionals, whilst the German lender produced a surprise profit as it waits for the DoJ’s axe to fall.

Barclays’ £1.7bn underlying profit before tax is well above consensus forecasts (under the same basis) compiled by the group itself and more broadly in the market (£1.295bn-£1.275bn).

The results represent further vindication of CEO Jes Staley’s reluctance to withdraw from the more volatile international investment banking and trading businesses, to a similar extent to large U.K. rivals.

Corporate and Investment added £400m to its performance in Q3 2015.

What about those impairments and exceptionals?

It’s tempting to be casual about that inconvenient word ‘underlying’, however the assumption that provisions (particularly for PPI) are one-offs has proved to be quite debatable.

£600m was added to PPI provisions in Q3 2016 and notable impairments this time include a 42% jump from changed credit card risk modelling.

We see more risk at Barclays than AT Lloyds that its Q3 PPI set-aside won’t be its last.

We want to note that Barclays in fact officially reported only a modest 4.7% uplift to profit from continuing operations. After items, basic EPS remains flat on the level of the same quarter last year at 2.6p.

Meanwhile, the bank felt the need to restyle what looks like a stall in progress on capital as strategic.

CFO Morzaria stated this morning that Barclays is “more comfortable as a general statement not having to accrete capital every single quarter”.

To be absolutely fair, he also acknowledged that the group “went backwards by 10 basis points in the first quarter and there may be situations like that in subsequent quarters”.

The presented group common equity tier 1 ratio (11.6%) does lag peers though and will continue to limit the group’s margin for error and for dealing with the economically unexpected until the entire non-core drag has been disposed of (hopefully during 2017).

Overall, we—and the market, shares have been 3%-4% higher all Thursday—acknowledge the foresight of the group: it remained in prime position to capitalise on the economic and financial instability of the summer.

However, this foresight has certainly not made Barclays immune to the numerous uncertainties for British banks that remain in the years ahead.

Deutsche, like Barclays benefited from the surge in foreign exchange and fixed income trading from this summer’s Brexit vote-charged volatility.

But crucial return on tangible equity (ROtE) at both (2% at Deutsche, 3.6% at Barclays) lags the level generally regarded as required to turn a reportable, sustainable profit; around 10%.

And Deutsche, has of course, not just an elephant in the room, more like a whale, regardless of how much it eventually has to shell out after the Department of Justice demanded a $14bn fine, it’s going to be damaging. The risk is that the settlement will overshoot even bolstered level of provisions DB reported on Thursday (€5.9bn) seem more than evens.

This is part of the reason why DB shares surged higher early on Thursday before losing almost their entire 3% rise.

Stable ‘real’ profits at Europe’s two biggest ‘risk-seeking’ banks remain very much a work in progress.