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Fines, reforms force Deutsche Bank to face tough strategy choices
[FRANKFURT] Deutsche Bank will remember Thursday, Jan 8 as the start of "Duesselgate", a nickname born not of wrongdoing, but from the shockwaves sent by a speech given in Germany's former industrial heart.
Co-Chief executive Juergen Fitschen stood before some 450 staff and clients in Duesseldorf and wondered aloud whether the bank's claim to a universal strategy would survive. "Deutsche Bank is pretty much alone in Europe with this claim," he said only weeks after the group decided to examine its business model from head to toe.
"We're just wondering, what the right model is for Deutsche Bank, considering our local market and our global claims?" The term Duesselgate began to fly around the bank's Frankfurt headquarters, one employee said, so scandalized were staff by the nuance: Europe's only global universal bank, which offers everything from deposit accounts to derivatives trading, may throw something overboard.
Mr Fitschen did not elaborate and the bank has repeatedly said speculation about any sales would be irresponsible.
Deutsche faces eye-popping fines, tough regulations and lagging profitability that made it the worst stock market performer among global investment banks like JP Morgan and Goldman Sachs in 2014.
Germany's top bank's price/book ratio is around 0.6, meaning investors believe its assets are worth barely more than half of what the bank says they're worth.
Duesselgate means that Deutsche Bank has hit a turning point, one where it may cease trying to be all things to all people and where a partial breakup of the group is possible. Few doubt that 2015 will be a brutal year of cost cuts, restructuring and expensive penalties.
At a discussion later in the Swiss resort of Davos, co-CEO Anshu Jain admitted that of all the business models, universal banks had it the hardest.
He stumbled after a panelist's question whether Deutsche Bank would be bigger or smaller in the future, but then recovered. "We're the ones that are completely under the lens at this point," he said. "We owe it to the regulators, if we want support for models of that kind, to run it very prudently with low complexity and very high levels of capitalisation."
One scenario discussed internally at Deutsche is selling half of its Postbank-branded retail unit, which it bought from 2008 to 2012 for over six billion euros, on the stock market.
By splitting off its retail operations, Deutsche would simplify its model, raise capital and retreat from the low-profit battlefield that is German retail banking.
It would transform Deutsche into an investment- and merchant bank aimed at companies, capital markets and investors, similar to Goldman Sachs. It would represent a reversal for a group that has gone to great efforts to broaden its earnings stream away from volatile income like investment banking.
One disgruntled fund manager with a large stake said the group could easily eliminate 20 per cent of its retail branches and cut 10,000 heads from its 98,254 staff. "Costs are too high in the entire organisation," he said.
But selling Postbank carries the risk of cutting Deutsche from its roots in the German economy, and is easier said than done. A strategic buyer for a big Postbank stake like the euro zone's biggest bank, Santander, is unlikely to appear, said Eva Olsson, analyst at Mitsubishi UFG in London. "The German retail market is so competitive that it needs to consolidate. It's not a place where a bank like Santander would be tempted to go in. It's just not profitable enough," she said.
Deutsche still faces high costs, low profitability, and naggingly low capital levels, and its plan to become Europe's"last man standing" in investment banking has turned into an expensive wait as Europe's recovery stalls.
Its efficiency, measured by the cost/income ratio, deteriorated slightly to 85 per cent in the first nine months of 2014, much worse than the European average of around 63 per cent.
The European Central Bank's latest effort to revive the region's economy through bond purchases will make cost cutting even more important as the programme erodes lending returns.
Deutsche's return on equity was less than 3 per cent in the first nine months of 2014, well below the 12 per cent it aims to reach in 2016 and less than a third of the industry's cost of equity, which is around 10-12 per cent.
High legal costs have contributed to the poor showing. Deutsche Bank has paid over 7 billion euros in penalties and settlements since 2012 and faces another 4 billion euros or more, according to analysts' estimates.
The bank aims to reveal its new strategy by the end of June, but may offer a hint on January 29 when it reveals results and is expected to post its second quarterly loss running.
Whatever happens, the bank's supervisory board chief, Paul Achleitner, has put the management team under enormous pressure, said the fund manager. "If Fitschen and Jain don't sort this the second time around, they're out of the picture," he said.