Deutsche Bank Reclimbs the Ladder

After four years of restructuring pain, the German giant now posts double-digit jumps in revenue. Its CEO aims to take it even higher

By Gail Edmondson

The BusinessWeek 50

Deutsche Bank Chief Executive Josef Ackermann is nearing the end of his controversial four-year restructuring plan. He has axed 26% of the workforce, cutting it to 64,000, and poured billions into building up the Frankfurt-headquartered outfit as a major player in high-margin investment banking. Now, the effort is paying off. Revenue jumped 17% in 2005, while net income soared 53%, while return on equity—a measly 1% back in 2002—reached double digits at around 12%.

That performance was enough to propel Deutsche (DB ) to No. 38 in our rankings of Europe's top performing companies. Last year, it didn't even reach the top 50, occupying a modest 126th place out of 350. What's more, Ackermann's makeover is gathering momentum. In the first quarter of this year revenues rose 21% and net income jumped 55%, fueled largely by trading profits. "Ackermann has done a great job given what he started with," says S&P analyst Derek Chambers.

Still he's not home-free. Ackermann has yet to win the respect he craves in banking's big leagues. True, last year he hoisted Deutsche to the world's No. 3 investment bank for debt and equity underwriting, and No. 5 in terms of global revenues. But he hasn't yet redeemed his 2002 promise to create a top investment bank across the board.

RELYING ON THE MARKETS.

  For instance, Deutsche ranked No. 9 behind Lazard Freres in global mergers and acquisitions. He remains woefully short on another pledge, to double Deutsche's market cap to about $100 billion. Today, it's about $56 billion. And though analysts forecast Deutsche will be able to raise ROE to 16% this year, Ackermann still needs to raise that figure by 50% to match industry leaders such as Citigroup and Barclays (BARC.L ).

Many analysts say Deutsche Bank's growth is overly dependent on trading in everything from currencies to stocks, bonds, and commodities, and its hedge fund investments. Trading assets have ballooned to 47% of overall assets while business and consumer loans have fallen to just 17%. "We think this shift increases the risk profile of the bank," says Chambers. "The big strategic challenge is to get diversity."

That's exactly what Ackermann is setting out to do next. With investment and corporate banking now generating 61% of Deutsche's revenues, Ackermann is finally turning his attention to fixing the bank's weaker private-banking and asset-management businesses.

NOT A QUIET BANKER.

  Deutsche's institutional asset-management business is the main problem. Merrill Lynch (MER ) analyst Stuart Graham estimates the unit lost more than $200 million last year, mostly in the U.S. He figures Ackermann should be able to increase overall asset-management earnings by more than $300 million by 2008. That boost, with a little help from a recovery in Germany and a better performance by the investment bank, could push Deutsche's shares up by as much as 33% over the next two years, says Graham.

The Swiss-born Ackermann has had a tough time ever since he took charge of the lumbering German giant in 2002. His focus on investment banking—run from London, Frankfurt's archrival—caused an acrimonious internal rift. A six-month criminal trial over payouts to Mannesmann management during the Vodafone Group (VOD.L ) takeover badly undercut his leadership, though he was acquitted. And the announcement of more layoffs last spring when the bank reported record profits incensed German public opinion.

All the same, Ackermann is now contemplating how best to extend Deutsche's global reach. Already, he has snapped up a bank in Poland and is eyeing acquisitions in Russia, India, Turkey, and China. He's also promising shareholders double-digit per-share earnings growth. He still faces a possible retrial later this year in the Mannesmann case. But Deutsche's board extended his contract in May through 2010—a vote of confidence in one of Europe's most-underrated bankers.

Edmondson is a senior correspondent in BusinessWeek's Frankfurt bureau

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