Deutsche Bank Investors Split on How to Boost Profit With RevampNicholas Comfort
Deutsche Bank AG’s proposal to exit retail banking is dividing investors on whether that’s the best way to boost returns.
Credit Suisse Group AG analysts on Tuesday cut their recommendation on the stock to neutral and said scaling back retail banking could drive up Deutsche Bank’s cost of equity. Analysts at JPMorgan Chase & Co. and Citigroup Inc. disagree, saying investors should buy the shares and that a sale of the retail business would increase profitability and capital.
Deutsche Bank co-Chief Executive Officers Anshu Jain and Juergen Fitschen are overhauling their strategy as a drop in trading activity put their profit targets out of reach. While selling the underperforming retail business could help shore up earnings, it would make the firm more reliant on its securities division.
“Deutsche Bank has taken a lot of steps to reduce its dependence on investment banking, but that hasn’t been enough to convince investors,” Michael Huenseler, who helps manage about 14 billion euros ($15 billion) at Assenagon Asset Management SA, one of the lender’s top 20 shareholders. “I can’t imagine that we’ll see an extreme solution, instead we’ll probably see consumer banking merged rather than sold off.”
The bank is considering three options, two people familiar with the matter said last week. Under one scenario, the retail unit would be sold to the public in 2017, one of the people said. That option, which would also see the investment bank unit narrow its focus, would provide the quickest increase in shareholder returns, the people said.
A Deutsche Bank spokesman declined to comment. The company plans to update investors on its strategy in the second quarter.
What follows is a summary of the arguments for and against a sale of the retail banking business.
* Shares. Deutsche Bank fell 24 percent last year, the worst performer among the top nine global investment banks. “Selling the retail business would be a reason to look closer at the shares because it would allow them to concentrate on what they know best and really accelerate in investment banking,” says Daniel Hupfer, who helps manage 50 billion euros including Deutsche Bank shares at M.M. Warburg in Hamburg.
* Profitability. Retail banking had the lowest return on equity and the highest costs as a share of revenue of any of Deutsche Bank’s four units last year. None of the 19 analysts surveyed by Bloomberg expect the company to meet its goal of a 12 percent return on equity next year. Selling part or all of the retail business could improve returns, according to Kian Abouhossein, a JPMorgan analyst in London.
* Capital. With a leverage ratio of 3.5 percent, Deutsche Bank has the least capital as a share of assets of Europe’s 22 biggest listed banks, according to data compiled by Bloomberg. The bank needs to lift that ratio to above 4 percent and a sale of retail banking businesses would take it to 4.6 percent, according to Citigroup analyst Kinner Lakhani.
* Volatility. The investment bank is still Deutsche Bank’s largest unit, accounting for 43 percent of revenue last year, leaving the company exposed to downturns in that business. “There are going to be phases when investment banking does better or worse, so a degree of continuity with consumer banking is a good idea,” said Huenseler at Assenagon in Munich.
* Funding. Selling retail banking would reduce the company’s pool of deposits, a cheap source of funding, making it more similar to Goldman Sachs Group Inc. The loss of a stable business could also result in Deutsche Bank’s creditors charging the company more. “An exit from retail banking would be credit negative for Deutsche Bank” as “the diversification benefits of the retail business add protection for bondholders,” Moody’s Investors Service wrote in a report.
* Earnings. A rebound for the investment bank isn’t a sure thing given economic stimulus by central banks is still weighing on bond yields and regulators demand securities firms hold more capital. Deutsche Bank’s investment bank faces “significant headwinds” in terms of revenue, rising costs and regulation, analysts at Mediobanca SpA wrote in a report last week, cutting their recommendation to underperform from neutral.