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Banking Giants Earnings Battle: And the Winner Is…

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With banking behemoths UBS and Deutsche Bank announcing strong quarterly profit growth Tuesday, strategists face off on which bank is likely to trump its rivals over the long term in the volatile banking sector.

Deutsche Bank announced a 2.8 billion euros capital hike as well as preliminary first-quarter earnings late on Monday showing an increase in net profits to1.65 billion euros. The capital hike has come as a surprise to many analysts after the bank consistently insisted it had plenty of capital. The bank's share price was up over 6 percent in early trading on Tuesday.

(Read More: Deutsche Bank Hikes Capital to Strengthen Balance Sheet)

Credit Suisse lifted its rating on the stock to "neutral" from "underperform" and raised its price target to 35 euros from 32, arguing that the strengthened capital position should put the group in a better position to deal with regulatory challenges, a weak economy and any litigation.

The bank, Europe's second-largest by assets, underwent a high-profile reshuffle of its chief executives last year with Anshu Jain and Jurgen Fitschen taking the helm, but the new management's strategic vision received a muted reaction by investors.

Simon Maughan, financials sector strategist at Olivetree Securities told CNBC Deutsche Bank "is one of those stocks people love to hate" but insisted the Bank had a strong core which would hold it in good stead in the longer term.

"There are three strong positives and revenues overall are up 2 percent driven by asset and wealth management business which shows that Deutsche has other strings to its bow. Costs are down 5 percent and thirdly they've solved the capital problem. Deutsche has an efficiency ratio of 71 percent and UBS on an underlying basis has 76. Deutsche is doing better," Maughan said.

Swiss giant UBS easily beat expectations in what some analysts said was a "high quality beat". It reported first quarter net profits of 988 million Swiss francs ($1.3 billion) – driven largely by its investment bank and wealth management business - after two consecutive quarters of losses. CEO Sergio Ermotti told CNBC that the company's radical restructuring "is working". Its stock was also up around 1.45 percent earlier Tuesday.

(Read More: UBS Chairman: We're Seeing a Hands-Off Period in the Market)

Scott Evans, Head of Equity Sales at Espirito Santo Investment Bank, told CNBC that it was the Swiss bank which had the stronger credentials to outperform over the longer term.

"We've been long-term sellers of Deutsche Bank and long term buyers of UBS for quite some time. Looking just at PE [price earnings] does not give the full picture but it's the quality of earnings and UBS is much better quality than Deutsche Bank. The stock is up today because the market has been asking for Deutsche to raise capital for a long time, it's going for 2.8 billion euros [but] I'd say it's short of 9 billion [euros] so it's only going some way to that even if they raise that," Evans said.

Maughan defended Deutsche Bank's position despite its investment banking division remaining weak. He said the ability to pay a dividend and the size of the dividend would be crucial.

"UBS has been expensive all year and what the investors have been focused on has been the capital ratio and the ability to pay enhanced dividend from 2014, the enhanced capital is probably not as good as analysts were hoping for but UBS has delivered much better earnings and ultimately it's this growth that drives the dividend and UBS will grow into its valuation,"Maughan said

Evans argued that the approach of UBS and Deutsche differed as UBS was making a bigger stand when it came down to restructuring the business. He conceded however that Deutsche Bank could move ahead of its rival if headwinds changed.

"I will rate more highly the wealth management business [in the longer term] than the trading business and the retail bank at Deutsche Bank but if we have a sudden turnaround in the ECM business, (the) equity and fixed income business, Deutsche would outperform UBS," Evans said.

(Read More: UBS CEO: Risk Appetite 'Extremely Low' )

U.K. government-backed Lloyds Banking group also reported earnings on Tuesday. It swung to net profit of 1.53 billion pounds ($2.37 billion) in the first quarter, which Maughan said could be down to better margins for the bank.

"A lot of banks around the world are facing depressed margins that are getting lower but Lloyds has turned the corner on that, plus there's been a return to loan growth," Maughan said.

He described the U.K. government's funding for lending scheme – designed to inject more liquidity into the broader economy – as the "funding for hoarding" scheme.

"Mortgages are doing better [and] Lloyds is in the heart of that business and it's able to extend more credit to the economy," Maughan said.

He hinted that the banks'renewed fortunes could revive interest in the group suggesting a sale of the bank could be on the cards within 12 months.

By CNBC's Shai Ahmed; Follow her on Twitter @shaicnbc

Banks