Barclays And Deutsche Bank Reduce Asset Bases To Improve Core Capital Ratios

The largest European banks have seen their profits improve over recent quarters thanks to a strong economic outlook, as most of the fears related to the unexpected Brexit vote last year have largely been put to rest. This and the continuing efforts by these banks to streamline their business models helped them report a steady improvement in their their core common equity tier 1 (CET1) ratio figures over recent quarters. While HSBC consolidated its position as the best capitalized European bank with a CET1 ratio of 14.6% among major European banks, the largest improvement was reported by Deutsche Bank and Barclays over the last twelve months. While Deutsche Bank’s core capital ratio figure improved from 11.1% at the end of Q3 2016 to 13.8% now (an improvement of more than 270 basis points), Barclays boosted its CET1 ratio figure by a good 150 basis points from 11.6% to 13.1% over this period.

We maintain a $11.50 price estimate for Barclays’ shares, which is about 10% above the current market price.

The figures at the end of Q3 2017 and the 2019 fully phased-in target compiled here are as reported by each of these banks in their latest quarterly reports.

The CET1 ratio is a key quantitative measure used by financial regulators to gauge the strength of a bank. Additionally, regulators around the globe use this metric as a part of their annual stress tests to ensure that a bank’s capital plans for a year do not undermine their capital positions in the event of a downturn. A larger difference between the current and target CET1 ratios gives a bank more leeway in distributing cash to investors in the form of share repurchases and dividend hikes.

The largest European banks have yet to match their U.S. counterparts in terms of dividend payouts and share repurchases, as they continue to shore up their balance sheets. While Deutsche Bank’s notable improvement in its CET1 ratio figure is a result of share issuances as well as a reduction in risk-weighed assets, the single biggest factor contributing to Barclays’ higher capital ratio figure is its decision to divest most of its stake in Barclays Africa Group Limited (BAGL). After the latest stake sale, completed earlier this month, Barclays owns less than 15% of BAGL – down from a peak level of 62.3% in early 2016.

We incorporate all cash returned by Barclays to its shareholders in our analysis of the bank using an adjusted dividend payout rate, as shown in the chart below. You can understand how a change in Barclays’ adjusted payout ratio affects its share value by modifying this chart.

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