Pros and cons

Sink or swim for Deutsche's investment banking

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Source: Fotolia / Handelsblatt Global

PRO
Deutsche Bank can only compete in the big leagues by staying in investment banking. And that’s the only way it can benefit the German economy, argues Michael Maisch.

When deciding whether to radically shrink its securities trading business, Deutsche Bank should toss its ideological ballast overboard. On one hand, this means stepping back from today’s ritual bashing of investment banking, and on the other, quashing nostalgia for “the good old days” when Germany’s largest lender supposedly served customers in a selfless and respectable manner (something of a myth).

Granted, the scandals that plunged the bank into crisis were rooted in investment banking. And yes, this corporate culture was famously uninhibited. Still, it must be remembered that Deutsche Bank used to scoop awards for being the world’s best bank. That success came from the edge it held over the German and European competition: in investment banking, where the bank still earns the lion’s share of its income.

But in terms of percentage returns, this business is very weak – a reminder that Deutsche will have to sharpen up its trading activities, and that sheer size isn’t an asset in itself. But the question remains: Where is the growth supposed to come from, if not from investment banking?

“Turning Deutsche Bank into a 'Supersparkasse' or a Commerzbank clone will not serve anyone.”

Michael Maisch

The bank’s second arm, retail and corporate banking, will be busy with the awkward integration of Postbank, formerly run by Germany’s postal service, for some time to come. Once this giant project is concluded, Deutsche’s personal bankers will have to plug away in a fragmented market with tepid profit margins. The third area, asset management, works reasonably well but is too small to do the heavy lifting, at least in this business model.

The only conclusion is that Deutsche must reassert its claim as Europe’s leading investment bank. If that fails, the new boss, Christian Sewing, will have no choice but to seek a merger with a rival. Germany needs a bank that can act globally and has financial market savvy. Turning Deutsche into a kind of Supersparkasse (a super-sized savings bank) or a Commerzbank clone will not serve anyone, not even the German companies among its clients.

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CONTRA
Once the toast of the town, Deutsche’s investment bankers have left behind a huge mess. The bank has to act fast to stop the rot, contends Daniel Schäfer.

The revolution came from within: Starting in the mid-1990s, an unscrupulous bunch of Anglo-Saxon securities traders took over the engine room at Deutsche Bank. Benefiting from the naïvety of their top bosses – who had mountains of German savings to play with, and implicit state rescue guarantees if it all went wrong – they poured this borrowed money into ever larger and riskier short-term bets, enriching themselves handsomely in the process.

The bill for this decades-long adventure in global investment banking is devastating: more than $16 billion (€13 billion) in fines and nearly €33 billion ($40.6 billion) in capital increases since the financial crisis. Not to mention €9 billion in losses in the past three years alone.

Meanwhile, Deutsche’s top executives are realizing that it wasn’t a good idea to give full reign to these mercenary traders. Ultimately, the institution paid dearly for its spot in the premier league of global investment banks, by using illegal tricks, taking big risks, leveraging oodles of debt, and doling out excessive bonuses, all while failing to invest in internal control systems and IT. Actually, Deutsche was never really competitive in investment banking.

“Deutsche Bank was never really competitive in investment banking.”

Daniel Schäfer

To date, the bank is overly dependent on a business that earns the majority of its revenues but is barely profitable, incurring costs that are far too high and weigh on its balance sheet. Weakened and disoriented, the lender ultimately became powerless to serve its old customer base – large companies and individual clients – with any kind of vigor.

Just to be clear, an investment bank isn’t fundamentally shady or useless. And it would be naïve to think that today’s Deutsche Bank could be content, as it was 150 years ago, to lend for commercial finance. Large companies now hedge against currency risks, switch variable rates into fixed interest rates, and raise funding on the financial markets.

These activities require a global bank with financial market expertise. But they don’t need an oversized trading unit that leads a life of its own and inflates the balance sheet with low-yielding securities.

Deutsche Bank’s tail has been wagging the dog. Time to turn this around.

This article was adapted into English by Jeremy Gray, an editor at Handelsblatt Global. To reach the authors: maisch@handelsblatt.comd.schaefer@handelsblatt.com

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