Deutsche Bank should cut rates unit by 50%, autonomous note says

[BERLIN] Deutsche Bank AG should cut its interest- rates trading business in half in a "radical slimming" of its investment bank to meet profitability targets, according to Autonomous Research LLP.

"Slashing the rates business by 50 per cent is the obvious way forward" because rates trading accounts for about 20 per cent of leverage ratio assets and makes an estimated 4 per cent return on equity, according to a Feb 3 note by Autonomous's London-based founder Stuart Graham that was reviewed by Bloomberg News. "However, retreating in rates would be a difficult pill for management to swallow, given the firm's DNA and commitment to be the 'last man standing.'" Deutsche Bank, whose co-Chief Executive Officer Anshu Jain helped build the trading businesses, is undertaking a review of its strategy to improve profits and a market value that's worth less than tangible book. The investment bank accounts for about 57 per cent of the assets that are counted in the so-called leverage ratio that determines Deutsche Bank's capital requirements, according to the Autonomous note.

A "sub-optimal" way to boost return on equity to 12 per cent would be to sell Postbank, the retail banking unit in Germany, the note added. Postbank could make a 9 percent return on equity by 2017 and helps Deutsche Bank by providing a stable source of funding and reducing its reliance on trading, according to the note. The Postbank retail business accounts for about 18 per cent of the company's leverage assets, Autonomous estimated.

"In short, we see no panacea for Deutsche," Mr Graham said in the note, adding that Autonomous is maintaining the stock as a "feature underperform" and recommends investors buy shares of London-based Barclays Plc instead.

Michael Golden, a spokesman for Deutsche Bank, declined to comment.

Deutsche Bank's revenue from dealing debt and currencies rose 13 per cent to 1.15 billion euros (US$1.31 billion) in the fourth quarter from a year earlier, the company said last month, beating estimates.

Mr Graham didn't reply to a phone call and e-mail seeking comment. He led Merrill Lynch & Co.'s European bank stocks research team, which was ranked No. 1 by Institutional Investor magazine, before founding Autonomous in 2009.


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