Deutsche Bank AG (DBK), Germany’s biggest lender, should reduce leverage and cut compensation as banks recast their businesses to emulate low-risk utilities, said Davide Serra, founder of London-based Algebris Investments LLP.
“On any metric, they tend to be one of the most levered banks today,” Serra, a former Morgan Stanley (MS) executive, told Bloomberg Television’s Erik Schatzker and Stephanie Ruhle in Davos, Switzerland. The Frankfurt-based firm should pay less and shrink because it has too many assets that aren’t “as profitable in the new regulatory environment.”
Deutsche Bank is selling and winding down assets as regulators and investors push financial firms to reduce risk and bolster balance sheets. Shareholders’ willingness to pay a premium for steady earnings is prompting some banks to rely more on asset management and brokerage arms while cutting riskier units such as fixed-income trading, where profits have swung, said Serra, whose firm oversees $1.3 billion of bank shares.
“The financial industry is becoming a utility,” he said. “The returns will be lower, there will be less money, it will be more stable, which is what ultimately governments and, let’s say, citizens want. That means people will have to be paid less.”
Emulating utilities means that banks’ lawyers, for example, will no longer earn more than peers in other industries “simply because they work in finance,” he said.
Deutsche Bank, led by co-Chief Executive Officers Anshu Jain and Juergen Fitschen, reported this week that legal costs and lower debt-trading revenue caused a surprise fourth-quarter loss. The firm’s risk-weighted assets fell to 355 billion euros ($481 billion) at the end of December from 365 billion euros three months earlier. The balance sheet shrank to 1.45 trillion euros from 1.52 trillion euros under European Union definitions.
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