For Deutsche’s i-bank to succeed, rivals must fail
By Margaret Doyle
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
LONDON — Anshu Jain has an answer for investors worried about how investment banks generate decent returns while holding more capital. Deutsche Bank’s investment banking chief reckons the division can deliver a pre-tax return on equity of 20 percent to 25 percent even after tough new rules are introduced in 2013. But the plan depends on Deutsche winning market share in areas like equities and commodities. And its rivals have similar ambitions.
Last year, Deutsche’s investment bank earned a respectable 28 percent ROE, before tax. But factor in the effects of impending new regulations and capital requirements, and that figure would have shrivelled to just 10 percent to 12 percent. In order to get back above 20 percent, Deutsche will have to take several steps.
First, the investment bank must shrink its risk-weighted assets, thereby limiting the amount of extra capital that the unit is required to hold. Jain reckons this process, which appears to be on track, will add between 5 and 6 percentage points to ROE.
Cost-cutting and increasing market share, meanwhile, will boost ROE by a further 5 to 7 percentage points. This will be harder to achieve. Deutsche has already reduced the cost-income ratio in its corporate banking and securities businesses to 69 percent, 5 points lower than in 2007. Jain reckons he can get it down below 65 percent in the medium term. But cost-cutting gets tougher the more you do: in the first quarter, Deutsche was behind schedule with this year’s cost reduction plans.
The bank’s planned market share gains look even more ambitious. Deutsche has sliced the global industry into 64 separate businesses, and claims to rank in the top 3 in 35 of them. Jain has now set his sights on boosting Deutsche’s presence in areas where it punches below its weight, like U.S. and Asian equities, equity derivatives, and commodities.
However, as Jain himself admits, every other investment bank is also trying to do the same. With overall industry revenue static, others must lose in order for Deutsche to win. Jain maintains that Deutsche is simply better at growing market share. But its rivals are unlikely to give in without a fight.