Deutsche Bank’s Ills Won’t Be Cured by a Merger

(Bloomberg Opinion) -- Time for Deutsche Bank AG’s Christian Sewing to seal his legacy as chief executive officer appears to be running out. But before he rushes into an audacious, government-orchestrated merger, he shouldn’t overlook what he can do on his own.

It’s pretty clear that short of a significant rebound in trading, or a massive upswing in what the lender can charge consumers – and it wouldn’t be extreme to characterize both of those as miracles – Sewing will find it difficult to extricate the lender from the vicious circle in which it is trapped. As interest rates stay low for longer, a combination of declining revenue, a stubbornly high cost base and rising funding expenses will keep squeezing profitability.

Hence he is intensifying merger talks with cross-town rival Commerzbank AG in an attempt to ease both firms’ misery. It’s an ill-conceived deal that might help reduce the firms’ funding costs in the medium term. It will do little to fix the underlying problem at Deutsche Bank’s investment banking arm.

Addressing that would require another reboot, the fifth in four years. To stand any chance of convincing stakeholders, Sewing would have to articulate a distinct, medium-term vision for the company. Under his leadership and that of his predecessor, the 150-year-old firm has been sorely lacking a sense of trajectory, let alone destination. Both managers trimmed the investment bank around the edges, but stopped short of a radical rethink.

Sewing has one last card to play: giving up on the ambition to compete with Wall Street peers on U.S. turf to become a leaner, more European focused securities firm. Given the investment bank would still require a revamp even if the merger goes ahead, he could serve his own interests and that of shareholders by getting on with it now.

Roughly speaking, the corporate and investment bank makes up about two-thirds of Deutsche Bank’s leverage exposure and risk-weighted assets. Yet it remains woefully inefficient. The unit, which incorporates transaction banking, had a cost-income ratio of 95 percent last year, returning a paltry 0.9 percent on equity.

The Wall Street Journal reported this week that the firm’s equities trading business has been losing money for many years. Sewing has cut about a quarter of the division’s staff, but a $750 million loss on revenue of about 1.9 billion euros ($2.1 billion) in 2018 underlines how big a rethink is needed. Deutsche Bank’s market share has almost halved in four years, according to Bloomberg Intelligence, with the top players gaining an ever larger piece of the pie.

Equally, being a bit player, or at least outside the top five, in U.S. capital markets and M&A is a costly proposition. Deutsche Bank has consistently ranked eighth or ninth in the league tables of U.S. stock offerings. It slipped five places to 13th in U.S. investment grade bonds last year and fell to 11th from eighth spot in the U.S. merger rankings.

There are signs that a partial retreat in U.S. equities is damaging Deutsche Bank’s other businesses. As recently as July, the lender expressed confidence that it would maintain its position as the fourth-largest house globally in fixed income and currencies, but its lead was eroded last year as U.S. firms gained share.

That Deutsche Bank ended 2018 with a larger stock of Level 3 assets is a sign that the firm is still chasing business in the more complex and illiquid parts of trading. It goes against the de-risking the firm has vowed.

A retreat from the U.S. may only buy the company another year or two of independence, until the next CEO perhaps. But at least Deutsche Bank would then enter any merger as a stronger partner, with a functional investment bank. Combining it now with Commerzbank’s far smaller securities operation won’t address the operation’s underlying weakness. That the two banks still seem set on rushing into a tie-up is a sign of desperation.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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