The noise in and around Deutsche Bank’s AGM last week was all about who’s going to replace Josef Ackermann when he retires in 2013. To be honest, everyone seems to be getting a little fractious around the subject. I touched on it back in March as part of a broader piece about succession and recent changes at the top of the investment banking industry. (As I recall, I took some heat for my comments!)
You get the impression there’s a lot going on behind the scenes at DB. But as there’s little concrete news at this point, I thought I’d focus instead on an intriguing comment Ackermann made at the AGM in response to a question.
Keith Mullin, Editor at Large, International Financing Review
Someone asked if Deutsche Bank had the potential to rise to the top in investment banking, to which Ackermann replied: “I can imagine that one day we could overtake Goldman Sachs”. At the same time as a vague-ish question might deserve a vague answer, and to the extent that it might have caught him off guard, Ackermann’s heavily hedged response was hardly the kind of upbeat response you might have expected from a CEO in front of his shareholders.
The first thing to note is that Ackermann sees Goldman as the firm to beat. No surprises there; that’s generally, if begrudgingly, accepted across the industry. But it’s interesting nonetheless to hear it validated by a rival bulge-bracket CEO. It’s unclear whether the questioner meant investment banking in its narrow sense as in advisory or whether it was a broader question about all activities undertaken by investment banks, but an avid industry watcher like me needs no second invitation.
So I took a look at the 2011YTD deal volumes and fees earned by both houses across advisory and capital markets, as well as reported Q1 trading revenues. While it’s not exactly a one-sided contest, there’s no doubt that Deutsche Bank has some way to go to catch Goldman, which in fairness will take some beating by anybody. GS generated net revenues from advisory, capital markets and trading of just shy of US$10bn in the first quarter of 2011 (see Table 1), while Deutsche came in at US$7.8bn. That quantum of difference has been pretty constant over the past five quarters.
However you cut M&A or ECM, Goldman is well ahead of the field, both from a league table and revenue perspective (see Table 2). DCM, one of Deutsche’s marquee products, is a different story. Goldman inhabits the bottom half of the top 10 or below in league tables and doesn’t profess to be a flow DCM house, unlike DB. Over the past five quarters, Deutsche has averaged +24% to GS in debt underwriting in net revenues terms.
In advisory and equity underwriting, though, the differences are more marked in GS’s favour. In advisory, GS has on average reported net revenues two-and-a-half times bigger than DB’s. In equity underwriting, GS has averaged +72%. On the hard performance data, in summary, it’s hard to see anyone taking Goldman’s crown at this point across the range of product segments.
Now or never
Of course, the ‘world’s best’ accolade comes with it a whole range of issues like legacy, history and reputation. These softer issues make it notoriously difficult to persuade naturally conservative corporate clients to switch their allegiances. It takes time and patience. Investment banks need to nurture clients over years, often involving offering services and support pro bono to start with in the hope of getting business in the future. To become the trusted advisor that puts you at the centre of your client’s world is a long haul.
But there are a lot of people out there forecasting the demise of Goldman Sachs. I’ve been arguing for some time that if anyone’s going to get Goldman, it won’t be competitors; it’ll be regulators and politicians backed by the baying crowd. The deafening cacophony of criticism directed at the firm is pretty damning.
For the past three years, Goldman has been repeatedly held up as the paragon of everything that’s wrong with Wall Street and the global financial industry. Even if a lot of criticism is misguided, wrong or plain vindictive, you get the impression that if it goes on for long enough, it’ll have to have some sort of impact.
At this stage, there’s no hard evidence that Goldman is losing clients. But you do wonder where it’s all going to end. Senator Levin hasn’t had his pound of flesh, and the full effects of Dodd-Frank haven’t yet kicked in. Of course, Deutsche Bank has been implicated or is under investigation for a host of supposed misdemeanours, and recently lost a case in the German courts over a structured derivative it sold to a client. So it’s not as if DB is in the clear on the reputation front.
All of that notwithstanding, though, I get the impression that if things are going to change, the next year or two offers the best opportunity for some considerable time. This could be the perfect time for competitors to turn up the heat.