Anshu Jain was doubtless smiling between firmly gritted teeth as the Strategy 2020 circus got underway on Monday morning. The bank Sunday had reported a 15% uplift in Q1 net revenues in the corporate banking and securities division relative to the same period of 2014 as pretty much every major segment fired on the back of that bout of volatility we had during the quarter as well as close to record-breaking M&A activity.
On the numbers, DB fell broadly into the pattern that has emerged right across the IB industry: debt trading up 9% thanks to significantly higher FX and rates revenues. But DB went one better than most on the Street by also reporting significantly higher flow credit revenues, which I’d commented when the US banks’ results came out is fast becoming the industry’s new Nemesis. EM was also higher.
Equity trading soared 31%, while origination and advisory leaped 26% – with advisory playing the starring role. Lower distressed debt and RMBS revenues kind of spoiled the fun but not enough to derail the party. The party, of course, had already been well and truly pooped by the chunky US$2.5bn Libor-rigging fine.
Five-year plan
And so to the next strategy phase, which we’re told received unanimous support from the supervisory board. In truth there isn’t much new to say, as the deliberations and options had become public over the past few weeks. DB reaffirmed its commitment to being a “leading global bank based in Germany”. I must say this tick-box political reference to the seat of its HQ and to Germany Inc does sound a little contrived. But beyond that, cutting gross leverage in the investment bank by some €200bn and redeploying between €50bn and €70bn in relationship-driven businesses will have ticked a lot of boxes.
As will investing €1.5bn to super-charge transaction banking and asset and wealth management; gravitating the retail business to an advisory-led platform; investing in digitisation; reducing the geo-footprint; and optimising the operating model. All geared to producing annual gross savings of €3.5bn for a one-time cost of €3.7bn; it looks pretty good on paper. IPOing Postbank by the end of 2016 and shrinking and transforming the DB-branded retail footprint will likely elicit more mixed views.
It means that despite the cuts, the investment bank will continue to have to do a lot of the heavy lifting in terms of sustaining the group’s earnings profile. Mind you, that was hardly a surprise: the hiring of Jeff Urwin from JP Morgan in February as co-head of CB&S had effectively provided all the evidence you would have wanted that investment banking would continue to play a central role in the group’s fortunes. Not, of course, that the group had many alternative options. Over time, however, we’re likely to see the balance shift towards ‘CB’ away from ‘S’.
Working to a 5% leverage ratio and a fully-loaded Basel 3 CET1 ratio of around 11% speak to the co-CEO’s aspiration to operational robustness, while the toned-down (although still-lofty by present standards) 10% ROE target speaks perhaps to a greater modicum of realism. The earnest and righteous endorsements of client-centricity, delivering value, and the universal banking approach were a bit of a yawn. But what else are Anshu Jain and Juergen Fitschen going to say? It’s a sine qua non of strategy reveals.
How the business model is unique to Deutsche Bank – which was one of the weird claims in that concocted co-CEO quote written by a committee of PR and management consultants – is a mystery to me because the bank is following exactly the same path as pretty much every bank out there. If anything it’s taken DB longer to articulate a desire to exit lower-return businesses, allocate capital to higher-return product and concentrate on – what else? – client solutions.
Once a trader…
So why my reference at the top to gritted teeth? Well, Anshu Jain has expended an awful lot of effort and exuded all of the signs of having fully extricated himself from his gun-slinging FICC trading background. His PR folks hate it when I mention his background, but trading is part of Jain’s DNA and I bet his heart started beating a little faster when that rates and FX volatility emerged during Q1 and not just because it added to his bottom line.
Of course that volatility and the better revenue profile it created presents the bank with a conundrum and I wonder if Jain is already second-guessing the plan and wondering how he’s going to get off that treadmill to curtailing trading RWAs. Sure, industry FICC revenues have collapsed over the past five years as the lack of client preparedness to trade has cut trading volumes and velocity while capital rules have roiled the structured and longer-dated end of the market.
I’m not going to get back into that cyclical or not debate – I’ve always firmly believed that the fortunes of the core FICC business are cyclical. The first quarter proved beyond doubt that if and when volatility does emerge, clients will want to express a market view or recalibrate their hedges and volumes will pick up with immediate bottom-line impacts.
Here’s the thing: if DB’s ambition is to cut €200bn of assets out of the investment bank, the trading businesses will bear the brunt of that, thereby cutting the group’s firepower and ability to capitalise on the likely upswing in activity as the Fed comes out of monetary stimulus. And don’t forget that by the time DB reaches the end of its new plan – in 2020 – the ECB will have followed the Fed out of QE, and dollar and euro rate structures will have normalised.
So in effect, Jain and Fitschen will have to exit or de-emphasise some of the businesses that are captured now in that lower-return bucket just as their prospects start to pick up.
When all’s said and done, where do DB’s moves leave us? Well the co-CEOs – Jain in particularly – have long made a play to be the last-man standing in Europe in investment banking. But what the group’s IB looks like by the end of this next phase is anyone’s guess. If I were advising Jain and Fitschen I’d suggest they stop making such bold claims – just as I’d advise Antony Jenkins to stop using the ‘go-to’ slogan when he’s similarly in the midst of figuring out what Barclays’ investment bank is and for whom.
I commented a couple of months back that DB’s announcement was looking even then as if it were going to have all the signs of one of those ‘sell the fact’ moments. And so it turned out: DB stock was off more than 4.5% at one point in morning trading.
Just as they were asked to do ahead of Strategy 2015+, investors are being asked by Deutsche Bank’s co-CEOs to give them the benefit of another five years which is, by the way, beyond the lifespan of their contracts. Bank strategy plans are starting to resemble those dreary economic planning expositions so beloved of former Soviet politburos – grand-sounding and aspirational but by definition studies in sophistry. Try and NPV that!
