Sideways: Deutsche strategy – Twilight of the bank

By:
Jon Macaskill
Published on:

Is Deutsche Bank contemplating a secret Götterdämmerung trade that would hive off sections of its investment bank and offer senior executives an escape route?

The strategy of the bank is looking increasingly perplexing to outsiders, with a potential spin-off of German retail banking unit Postbank widely seen as a measure that might raise some money, but that would leave the group even more exposed to an investment bank that is heavily biased towards struggling areas of the fixed-income markets.

The verdict of shareholders on the current Deutsche Bank business model is clear. Its shares fell by 24% last year and its capitalization of around €35 billion is roughly 0.6 of nominal book value, making Deutsche effectively the least-trusted big bank. 

There is little imminent prospect of Deutsche generating returns that cover its cost of capital, which for an investment banking-heavy firm is generally assumed to be between 10% and 12%. And the firm faces so many regulatory and litigation threats that its escape from censure by the UK’s FCA over foreign exchange-manipulation charges late last year came as a big surprise to market participants.

Remaining defiant

Yet senior managers, led by co-CEOs Anshu Jain and Jürgen Fitschen, remain defiant in the face of calls for a UBS-style overhaul that makes a partial retreat from investment banking an explicit goal. This has led to conflicting messages, as a show of bravado over commitment to the fixed-income markets and to a global investment banking presence, clashes with reassurances that meaningful cuts in balance-sheet exposure and costs are underway.

The bank has been open about scaling back in business lines such as credit trading and commodities, while also touting hires in other areas. 

Some of these hires are in compliance, and can simply be viewed as sunk costs that Deutsche is resigned to paying as a gesture towards regulators, who have shown signs of irritation at the firm’s failure to act on cues about its risk management and capital weaknesses, especially in the US.

But Deutsche has also been hiring new revenue-generating bankers, including a number of US appointments, which competitors find bizarre given its current plight.

This has led to speculation about if there is some unannounced agenda being pursued by senior executives. A spin-off of Postbank has been widely discussed by analysts and in the media, which indicates that it is likely to feature as part of the strategic review of operations that Deutsche plans for the second quarter. 

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The bank has not publicly acknowledged an intention to dispose of Postbank, but it has done very little to dampen the discussion, which has now moved on to reports that focus on how poor Postbank’s performance has been under Deutsche’s ownership and if it might make a better fit with another European group with a stronger track record in retail banking.

This debate conveniently diverts the focus from the problems in Deutsche’s core investment banking unit and the issues that come with its current status as a bank that is undeniably too big to fail.

Here is where the conspiracy theories start to kick in. An asset swap between Deutsche and Barclays has been suggested, only half-jokingly, that would create one retail banking unit and a single investment bank. 

It is difficult to see how the combination of two formerly dominant fixed-income franchises that are at different stages of contraction would work in practice, or whether regulators would sign off on a move of this type that created an even more unwieldy investment bank. There certainly wouldn’t be any great appetite for the role of primary regulator of that sort of Frankenstein bank.

But competitors wonder if a similarly bold move might be under secret consideration for certain portions of Deutsche’s investment bank, perhaps with a focus on its US operations. These currently look well-staffed, with many senior executives already in place, including veterans of Deutsche’s main investment banking unit in London. Access to capital remains the main potential weakness for Deutsche’s US unit, but a creative link-up with a third party could solve that problem. 

And for all the criticism of Deutsche’s top managers, no-one has ever accused them of shying away from complex, high-stakes structuring gambits.