Deutsche Bank Needs to Shrink Main Units, JPMorgan Analysts SayNicholas Comfort
Deutsche Bank AG needs to shrink its two biggest businesses of consumer and investment banking to lift returns, according to analysts at JPMorgan Chase & Co.
Germany’s largest bank will probably seek to cut 3.2 billion euros ($3.4 billion) of costs by the end of 2017 and set a lower target for return on equity for that year, the analysts wrote in an e-mailed report on Tuesday.
Co-Chief Executive Officers Anshu Jain and Juergen Fitschen have sought to keep a full-fledged investment bank and consumer-lending unit since taking over in 2012, even as rising capital requirements hurt profitability. That objective looks increasingly outdated as returns lag targets and competitors such as Barclays Plc make deeper cuts. The bank has said it will present an update of its strategy in the second quarter.
“We believe management understands the need to adjust its business model strategically in the new regulatory world in investment banking as well as poorly performing retail banking,” JPMorgan’s Kian Abouhossein and Amit Ranjan wrote.
The bank should cut its leverage exposure by about 216 billion euros, or 78 percent, in consumer banking by reducing its stake in its Postbank unit to 44 percent and selling businesses in countries including Italy, Spain, Belgium and Poland, the analysts wrote.
In investment banking, the bank could reduce such leverage assets by 115 billion euros or 14 percent, while remaining in the “core” part of its fixed-income and currencies trading business, the analysts said.
Deutsche Bank could also free up capital by selling its 20 percent stake in China’s Huaxia Bank Co., which probably has a market value of 3.3 billion euros and a carrying value of 3 billion euros, the analysts wrote.
Deutsche Bank plans to lift return on equity to 12 percent in 2016, the Frankfurt-based company’s filings show. The analysts expect the bank to post ROE of 8.1 percent this year.