www.breakingviews.com
Josef Ackermann is giving Deutsche Bank a spring clean. He has streamlined the board and reaffirmed an ambitious return on equity target in the face of mounting doubt about its feasibility. He is preparing the bank he leads for hefty restructuring and job cuts. That might be what it needs but is not in itself a strategy.
Deutsche has long been seen as overstaffed in many areas. Its revenues per employee are among the lowest in the industry. And people familiar with it say it has a tendency to over-invest in extra bodies when a big piece of corporate business comes its way.
The decision to put the corporate and investment bank under two global heads, Michael Cohrs and Anshu Jain, apparently stems from the view that tough action is required to enhance productivity.
But Ackermann's latest push isn't entirely about costs. He is also acknowledging that Deutsche has lost ground in its home market. Bankers from different parts of the empire pitch ideas to German industrialists, ignorant of what their colleagues are up to. This approach hasn't gone down well with potential clients. Moreover, sometimes Deutsche's relationship with German business has seemed detached. Postbank's recent IPO is a case in point. Ackermann's solution to this is to create a special committee focused on securing German business.
There is nothing wrong with focusing on organic growth. But the concerns Ackermann is now addressing – a flabby cost base and a lack of focus in Deutsche's home market – are also evidence of wider structural problems.
Take the personnel issue. Deutsche has too many people but it is also worth asking whether it has the right people, and in the right areas. Much is made of the bank's over-reliance on the fixed-income business, and its concomitant need to diversify its revenue streams. But it also appears to have its fingers in too many pies. And while Deutsche is an acknowledged leader in the debt business, its other franchises tell a more erratic story. The bank is king of the German M&A scene, but ranks only 11th in European M&A so far this year, according to data from Dealogic.
This matters because Deutsche's strengths in financing are less valuable as that business becomes increasingly commoditized. Other banks capitalize on financing strengths by offering profitable ancillary services such as M&A and corporate advice. Deutsche does too – it just doesn't do it enough.
Moreover, it is easy to overstate the importance of beefing up in Germany. True, Deutsche has let business slip between the cracks. And it is politically expedient to be seen to be committed to at home. But Deutsche is already the market leader in its domestic investment and corporate banking segments. It might be desirable to have a bigger presence in the retail market, which would provide a cheap source of loan funding. But it is hard to see how Ackermann could build much scale – especially in retail. He passed on the chance to buy Postbank, and nothing else is available right now.
What's more, fixation on Germany could distract Deutsche from the challenge it needs to meet if it is to grow internationally, for instance in the UK.
Ackermann should bear in mind the outcome of Credit Suisse First Boston's restructuring, which has sapped morale and weakened the bank's relationship with Europe's boardrooms. Now CSFB is having to work hard to build up its muscle again. Deutsche might benefit from some nip and tuck. But this alone will not address its strategic imperatives.
breakingviews is Europe's premier English-language online subscription commentary service, supplying the top investment banks, hedge funds, asset managers and corporations with timely insight into markets, economics, companies and business.
In addition to its online service, breakingviews supplies its market-moving commentary to a handful of prestigious daily newspapers. These print partners include the Wall Street Journal Europe, Gaceta de los Negocios, la Repubblica, NRC Handelsblad, l'Agefi, Kauppalehti and others.