Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Deutsche Bank chief John Cryan seems only to have unhappy options in front of him as he tries to reassure markets and regulators that the lender can pay off legal bills, bolster its capital base and return to yearly profit -- all within a rapidly shrinking time-frame.

Case in point: The bank is said to be weighing a partial retreat from the U.S., the world's biggest source of investment banking revenues and an economy doing much better than Deutsche Bank's euro zone heartland. Losing ground in U.S. investment bank rankings, where the bank sits at number seven according to Coalition, would probably sap profit as well as prestige, even if it makes it better able to absorb losses.

Big Bucks
The Americas is the single biggest geographic market for capital markets and investment banking
Source: McKinsey

Still, a U.S. pullback probably makes more sense than getting rid of a business such as asset management, which provides precious diversification away from volatile investment banking work. Corporate banking and securities is the bank's dominant business in the U.S., so cuts won't be made lightly (see chart below). But investment banking drags on Deutsche profit globally, with a net return on tangible equity a negative 4.9 percent last year, including write-downs. At the asset management unit, it was a positive 30.4 percent.

American Splendor
Deutsche Bank's 2015 net revenue by geography shows the importance of U.S. investment bank arm
Source: Company filings

And, frankly, many European banks could do with a reality check on their global ambitions, particularly on Wall Street.

Competing with U.S. banks is getting harder. New York's finest enjoy stronger balance sheets and profitability than their European peers, taking more market share globally and retaining a grip on the U.S. top five. Banks' capital to assets ratio as measured by the World Bank is 11.8 percent in the U.S., versus 7.6 percent in the euro area. The biggest U.S. Banks enjoy a return on equity of about 10 percent, or double that of European peers, according to McKinsey.

Plus keeping a U.S. footprint is getting costlier. Regulations and capital requirements for big global banks with subsidiaries in the U.S. are becoming more onerous, as Cryan can attest.

Wall Street Shuffle
Shares of Deutsche Bank and European banks have fallen as U.S. banks grab more market share
Source: Bloomberg

A strict review of U.S. operations might put Deutsche Bank -- whose U.S. transaction bank and wealth-management business failed to clear regulatory hurdles earlier this year -- ahead of the curve. Foreign banks have already spent billions complying with new rules and shrinking operations. Deutsche Bank Securities Inc's balance sheet fell from about $250 billion to $150 billion between 2011 and 2016, according to Bernstein, with similar seen at Barclays and Credit Suisse. 

It might also build political capital with such a move. Becoming more European, even more German, may make Deutsche easier for reluctant lawmakers to defend. It could also help swing the pendulum in favor of less stringent capital rules in Europe, with the EU's financial services chief pleading recently for more support for financing the economy. A European banking industry that's losing ground to the U.S. is not something corporations or regulators want, hence the show of Deutsche support from German industrial stalwarts such as Daimler and Siemens. 

And, ultimately, if one of Deutsche's immediate goals is getting a better deal from the Department of Justice, a smaller U.S. business could always serve as part of the punishment.

None of this makes for an easy fix. Cryan's already tough plan to slash jobs and sell assets to avoid a capital hike keeps running into obstacles and will probably need a re-draft. Trying to compete as a global heavyweight in the U.S. may be too much of a stretch for this new world. Would retreating serve up a free lunch to American banks? Today, maybe. But it's one of the least bad choices in that pile of bad ones. Getting more support from shareholders, regulators and politicians would make the pain just about worth it. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net