Anshu Jain, the head of Deutsche Bank’s investment banking division, earned a promotion to co-chief executive officer in July by cementing the bank’s status as a debt trading powerhouse. He’s had less success in his seven-year effort to turn the equity unit of Germany’s largest lender into a global leader, a performance that may haunt the Frankfurt-based company as higher capital requirements threaten to make fixed-income businesses less profitable. “Jain’s track record is pretty good in terms of bringing businesses he’s managing to a top-three position, though he hasn’t done that with equities so far,” says Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein in London.
Jain took control of the equity unit, which trades stocks and equity-linked derivatives, in 2004. That year it ranked fourth based on its share of revenue generated globally by the nine biggest investment banks, according to data compiled by Bloomberg. In the first half of this year it fell to seventh, while the bank placed second in overall sales and trading revenue, which includes equities, fixed income, currencies, and commodities.
When Josef Ackermann steps down from the CEO role on May 31 next year, the India-born Jain, 48, will share the job with Jürgen Fitschen, 63, who is responsible for Germany. Jain declined to comment for this story. Deutsche Bank stock has fallen 39 percent in Frankfurt trading this year through Sept. 5, while the 46-company Bloomberg Europe Banks and Financial Services Index has lost 33 percent. The bank, which fared better than European competitors such as UBS and Royal Bank of Scotland in the credit crisis of 2008, is down 6.6 percent since the end of that year, compared with a 15 percent decline in the banking index.
New rules agreed to by the Basel Committee on Banking Supervision will force banks to set aside more capital for their fixed-income operations, making equities a more attractive pursuit. “Equities-geared banks are best positioned for Basel III,” Morgan Stanley analysts wrote in a paper with Oliver Wyman Group in March. “Little wonder so many firms are trying to enter or beef up their equities divisions.”
After Deutsche Bank’s equity unit suffered losses during the credit crisis, Jain changed its focus from bets with the bank’s own money and exotic structured products to serving clients without taking positions in the market. Jain replaced the management of the business and since 2009 has hired 150 people in equity research, sales, and trading, with a focus on North America and Asia. A revamp of the bank’s electronic trading platform to improve order management systems is scheduled to be completed by the end of the year.
Jain told investors at a June 1 conference in London that he is “committed and determined” to make it into the top five firms in the U.S. in trading stocks for corporate and institutional clients. He said Deutsche Bank is seventh now. The profitability of a trading unit often rises with market share, so climbing in the equity rankings may help Jain sustain returns for shareholders. “Typically at 10 you lose money, at seven you just about cover your cost of capital,” Jain said, speaking of industry rankings. “You start to return to shareholders at five; at three, you become hugely profitable.” Jain added that while the bank has gained market share in U.S. and Asian equities, it remains “underweight” in these areas. And the market share gains haven’t yet translated into higher revenue. Deutsche Bank’s portion of the total equity revenue pool shrank to 8.6 percent in the first half of the year from 11 percent in all of 2004, data compiled by Bloomberg show.
The U.S. equity business is the world’s biggest, representing “50 percent of the global commission pool,” says John G. Colon, a consultant at Greenwich Associates, a Stamford (Conn.) market research and advisory company. It is also the hardest to crack because it is so competitive. Climbing higher on the ladder will be a challenge, requiring additional investments in personnel and technology, according to Colon. “Deutsche Bank has made real strides,” he says. “But the mountain only gets steeper and air only thinner as you move up.”