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Deutsche Bank Doesn't Want Checking Accounts

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Deutsche Bank is considering the sale of all or part of its retail business or, at the least, serious cuts in the retail division. These days, it seems dealing with private clients may be becoming too much of a hassle -- and not just for Deutsche Bank.

The bank made a big move into retail in 2010, acquiring Postbank and its 14 million clients -- a bigger customer base than the 10 million Deutsche Bank had at the time -- and dwarfing all other private lenders in German retail banking.

"New regulation means that banks without a high quality funding base will be at a competitive disadvantage," Anshu Jain, then head of the investment banking arm and now the bank's co-chief executive, said at the time. "The value of long-dated and stable retail deposits is higher now than ever before."

QuickTake Currency Wars

Germans tend to take a traditional approach to finance, and many prefer to keep their savings in banks rather than investment funds or securities. That has recently been changing, however, because banks no longer want their money. Ultra-low interest rates make accepting deposits unattractive -- in effect, a bank has to subsidize depositors, and other sources of funding are cheaper. Some German banks (though not Deutsche Bank) have even introduced negative interest rates on large corporate deposits, and some smaller ones did the same for big private depositors. 

The European Central Bank's loose monetary policy also hurt interest earnings, which provided 80 percent of total income for German banks in 2013 -- about a quarter more than the global average. 

Retail banks found themselves squeezed both on the cost of capital and the revenue side. They had to find a way to cut costs. But that isn't easy when you're running a large branch network: Again, Germans are banking traditionalists and many off them would rather stand in line to talk to a clerk than do their business online or with a machine. In 2013, according to an AT Kearney study, Spanish banks cut the number of retail branches by 14 percent, and those in the Nordic countries were cut by 8 percent. In Germany, the number of branches only declined 1 percent. So Deutsche Bank, too, has found it difficult to trim its bricks-and-mortar network. Headcount in its retail division has increased.

So profitability suffered. According to a recent JPMorgan research note, the retail operation showed the worst return on equity of all Deutsche Bank divisions -- just 6.2 percent in 2014, compared with 13.8 percent for the global transaction banking division, which services corporations and other banks, or 10.8 percent for the asset management business. Profit was down 14 percent year-on-year. JPMorgan called the retail division a "problem child" and recommended a spin-off: its analysts are skeptical that Deutsche Bank can deliver on targeted cost cuts of 1.5 billion euros ($1.6 billion).

Deutsche Bank is expected to decide the fate of its retail business by the end of next month. Whatever the decision, it will probably close 250 of its 1,800 retail branches.

The bank's management understands that incremental cost cuts are a difficult route with uncertain results, and that a spin-off would be the quickest and surest way to boost shareholder returns. That method carries political risk, however. "By abandoning retail, the bank loses it aura as a national treasure," the German publication Manager Magazin said yesterday. "That can hurt it during the next crisis by undercutting its political influence. It won't be easy to obtain a bailout for a more or less pure capital markets bank."

By now, however, Deutsche must be tired of trying to anticipate the desires of politicians and regulators. Five years ago it seemed they wanted banks to concentrate on traditional business such as retail and old-school commercial banking. Investment banks came under attack, and there has been no shortage of conspiracy theories about their activities. Deutsche, too, has been targeted by investigations into market-fixing, and in the last quarter of 2014, it had to increase its litigation provision by another 772 million euros. No wonder cuts to the investment banking business are also part of its strategic plans.

At the same time, however, Europe's monetary authorities were working to make the safest, least imaginative banking activities unprofitable by driving interest rates down to zero and beyond. So what is a universal bank like Deutsche to do? The most tempting choice is to shed all the ballast and concentrate on the few areas that can still be profitable.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net