Deutsche Bank

A Modest Proposal

Deutsche Bank-Bloomberg
Maybe one tower would be enough?
  • Why it matters

    Why it matters

    Deutsche Bank faces perhaps the biggest strategic overhaul in its history, mulling severe cutbacks in business to become leaner and more profitable.

  • Facts


    • The results of Deutsche Bank’s major strategic rethink could be announced as early as next month.
    • The bank’s management will present an interim report on the reform plans to the non-executive supervisory board on Friday.
    • Experts believe a radical austerity program is needed, including sharp cuts in its investment banking and retail banking business.
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Tomas Sedlacek, a Czech economist and frequent critic of unrestrained capitalism, is convinced that the terms modesty and bank are simply incompatible. “Accusing bankers of being immodest is like accusing a butcher of slaughtering animals,” the best-selling author said.

Mr. Sedlacek was speaking on a panel with Paul Achleitner, the head of Deutsche Bank’s non-executive supervisory board, at a finance summit in Frankfurt Tuesday hosted by the German newspaper Süddeutsche Zeitung.

Mr. Achleitner disagreed, of course, and did his best to defend his profession. Modesty is certainly a worthwhile individual pursuit, but too much modesty could paralyze society as a whole, because it would translate into the pursuit of overly modest goals, he argued.

Modesty is precisely what many analysts believe Deutsche Bank should be striving for as it nears the end of its search for a new strategy, an overhaul that could lead to the biggest restructuring in the bank’s history.

The bank’s management board, led by co-chief executives Anshu Jain and Jürgen Fitschen, will deliver an interim report on their findings to Mr. Achleitner and the rest of the bank’s supervisory board, which has to sign off on key management decisions, on Friday.

“We believe that management has understood that it has to adapt investment banking to the new regulatory environment; this also applies to the poorly performing retail banking business.”

Kian Abouhossein, JP Morgan analyst

According to financial sources, the executives will present a number of options at the meeting, but they are still a long way from reaching a final decision. The discussions will likely continue until well into April.

Nevertheless, investors, who have watched Deutsche Bank’s share price stagnate over the last three years since Mr. Jain and Mr. Fitschen took the helm, have already provided the bank with their own wish list.

“We believe that management has understood that it has to adapt investment banking to the new regulatory environment; this also applies to the poorly performing retail banking business,” said influential JP Morgan analyst Kian Abouhossein.

Mr. Abouhossein has compiled a detailed list of measures for the bank that call for deep cuts in investment banking and its retail banking business. It includes a reduced role in Postbank, its German retail banking subsidiary that was bought in 2009 but continues to be the subject of takeover rumors.


Paul Achleitner (middle) will have a say in who faces more cutbacks at Deutsche Bank in the coming years. Source: Tim Wegner/Laif


In Mr. Abouhossein’s view, Deutsche Bank should reduce its share in Postbank from 94 to 44 percent. It should also spin off its retail banking business in Spain, Italy, Belgium and Poland. Mr. Abouhossein also believes that the bank should sell its 20-percent share in China’s Hua Xia Bank, which has a market value of €3.3 billion ($3.5 billion).

But Mr. Abouhossein also said deep cuts are needed in investment banking, and that the division’s share of the bank’s total assets should be reduced by €115 billion, or 14 percent. The bank will then need to cut about €3.2 billion in costs from its remaining businesses by 2017.

The JP Morgan analyst argues this is the only way to bring the ratio of costs to revenues down to the level of 65 percent that has been promised by co-CEOs Mr. Jain and Mr. Fitschen.

If the bank implemented all of these measures, the bank’s return on equity – a measure of its profitability – could increase from 7.5 percent to at least 8.4 percent by 2017. Its core capital ratio – a measure of its reserves held against its riskier lending operations – would improve from 11.7 percent to 13.3 percent.

Mr. Jain and Mr. Fitschen, in an initial restructuring launched in 2012, had in fact intended to bring the bank’s return on equity up to around 12 percent by the end of this year.

With his list of measures, Mr. Abouhossein has essentially compiled a moderate synthesis of the more radical proposals made by other analysts. Omar Fall of the U.S. investment banking firm Jefferies has advocated selling off the retail banking business entirely to reduce the bank’s leverage ratio.


118 Deutsche Bank-WTB (3)


Stuart Graham of Autonomous Research, by contrast, favors cutting the bank’s sovereign bond business in half. However, he also concedes that this would jeopardize the DNA of Deutsche Bank, which has traditionally been one of the world’s strongest bond traders.

Many of these more radical proposals effectively call for a slimmed down bank that would return to its roots in Germany, and giving up its wishes of global investment banking domination.

Mr. Jain has no intention of giving up the bank’s new DNA, a position it fought hard to win over from U.S. investment banking houses during the more expansionary days of banking in the 1990s and early 2000s.

“I don’t sense a great move to make Deutsche Bank an exclusively German institution,” Mr. Jain said, appearing at the same forum as Mr. Achleitner. “Why would you want to have a domestic only banking sector, when your underlying economy is so profoundly global?”

Mr. Jain said he sees Deutsche Bank remaining a global bank with a strong investment banking business in the future. He argued that, because regulators are forcing many banks to shrink their assets, Europe urgently needs alternatives to bank loans. This alternative can only be provided by capital markets that are the lifeblood of investment banks.

Mr. Achleitner also defended the concept of strong and global investment banks: “Why are we so focused on forcing all European banks out of this business? Do we really want only Americans to be left sitting at the table?”

Both of their questions were probably rhetorical.



Michael Maisch is a deputy head of Handelsblatt’s finance section in Frankfurt. To contact the author:

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