Deutsche’s crash diet
Jain and Fitschen will hope to find new strength around a core of fixed income, transaction banking and AWM.
Neatly absolving himself from a share of the blame for overseeing the growth of a highly inefficient bank, Anshu Jain – the co-chief executive of Deutsche Bank – told investors last month that the best and only way to grow market-leading businesses in the past 15 years or so was in siloed systems with their own IT, client coverage and other systems.
Now he says it is time to bust the silos, share costs and reduce duplication – and do so on a big scale across businesses, including not just investment banking but asset and wealth management and retail banking too.
The results of the 100-day review of Deutsche’s business, conducted by Jain and his co-chief, Jürgen Fitschen, went much further. It seems that Deutsche’s new management are asking the questions that every bank chief needs the answers to.
Jain says the bank is now making four assessments of every business line: does it add value for clients, meet target financial returns, align well with long-term business trends and contribute to a balance in group earnings? Any business that passes three or four of those tests is likely to be retained and even invested in. Those that fail three will be jettisoned. The key management challenge will be in turning around those that pass two tests and fail two.
Colin Fan and Robert Rankin, co-heads of CB&S, reveal some surprises in the turnaround category, including European equities and Asia-Pacific equities. In primary markets Deutsche doesn’t expect ECM to come back to the peaks of previous years during this next three-year period. In the secondary market, cash equities volume is down 10% year on year and well below 2010 levels, and margins have trended lower. It can’t reach its financial targets through revenue growth. It has got to go on a diet.
Jain and Fitschen have also clearly been thinking which businesses will anchor investment banks as providers of a key role for wider society in capital formation. Supplying the real economy with funding is the obvious one. Investment banking profitability is driven by fixed income says Jain. Equity and corporate finance are high return on equity but low ibit [income before interest and tax] businesses with incredibly high cost-income ratios. You need fixed income, which is a stable business, to get that average cost-income down, but now, given Basle III, it will be a drag on equity returns.
It’s a conundrum for investors, regulators and bank managements. Banks have to choose between stable businesses, for example retail and fixed income within investment banking, that have a high level of predictability and scale but low returns on equity. Deutsche makes no bones that it is going to be a personal banking- and fixed-income-heavy organization.
Perhaps most surprising is the two businesses Deutsche now portrays as the growth parts of its story: global transaction banking and asset and wealth management.
Global transaction banking has been a somewhat overlooked gem at Deutsche, and business head Werner Steinmüller hopes to more than double ibit from €1 billion in 2011 to €2.4 billion in 2015. He aims to do so through a combination of doing more with existing clients, by winning new clients among non-bank financial institutions, for which it has a new sales force, and among SMEs, by taking advantage of its own credit strength to boost trade finance and by upping its game in dollar clearing to close the gap to leaders such as Citi, HSBC and JPMorgan. Analysts remain sceptical that it can double revenues in the next three years. Time will tell.
It will tell also on asset and wealth management, where Deutsche’s credibility is even more at risk as it strives to combine many disparate businesses, several of which it previously had up for sale, but for which it could not attract a decent price. Now these businesses will be subject to some savage cutting of overlapping back-office support functions as well as front-office product offerings.
The new AWM division will combine private wealth management, targeting growth among the same ultra-high-net-worth individuals every other firm is chasing, as well as institutional asset management and hedge fund and passive investment products previously built up inside the investment bank.
That has left Deutsche with three platforms for alternative investments, each with its own sales force and a proliferation of research. One of the bank’s best managers, Michele Faissola, is now on the case. He told investors: "Deutsche Bank has over 70 different custodians, 1,000 different vendors, and 650 unique IT systems of which only 53 are critical and only 20% are shared."
So there’s a lot of low-hanging fruit. It seems the same management team that allowed it nearly to rot will now want credit for harvesting it. At least they are getting on with the job.