I hear you, bad optics aside, Deutsche has not returned value to its stakeholders this year and it has certainly not met financial targets. Guess what? European peer Credit Suisse delivered on targets, CEO Tidjane Thiam announced a $3 billion share buyback and a 5 percent increase in annual dividends. The stock fell over 36 percent in 2018.
Distaste for European Banks?
Pure-play private bank Julius Baer settled the majority of its regulatory issues but lost high-profile CEO Boris Collardi. It nonetheless made great strides in all of its key markets, with exceptional performance in Europe in the face of great macro uncertainty. The stock fell over 35 percent in 2018.
Perhaps we have confused distaste for Deutsche with a distaste for European banks? Unlikely, Goldman Sachs stock lost 45 percent of its value in 2018. Perhaps we are discounting for an uncertain market environment and the ghost of misdeeds past? Likely. But Deutsche is not the only financial institution that will have to contend with that.
All of its Cachet
If the future success – and value – of Deutsche Bank depends on the robustness of its present strategy, then its intent to grow its wealth management business; curtail the growth of its investment bank in favour of its retail and commercial banking operations and reduce its exposure to the U.S.; is a good portent.
Wealth management is where the Deutsche brand retains all of its cachets, and it is a balance-sheet friendly business. In Asia, where the bank has expressed considerable ambitions, it has the wherewithal to capture a significant UHNW wallet share as indeed it has done in the past.
First to Signal
Betting on investment banking, by comparison, would be a worrying sign of hubris prevailing over good sense. It is a balance sheet intensive business that was subsidized through lean market cycles by Deutsche’s vast proprietary trading book. The bank could deploy capital elsewhere, possible in businesses that return better for much lower risk.
Deutsche may be the first to signal a retreat from U.S. investment banking, but I am convinced it will not be the last European investment bank to do so. As it is in many countries, the domestic U.S. market is skewed in favour of local players. Fees on everything from IPOs to M&A advisory are lower for international banks than they are for blue-chip U.S. players like J.P. Morgan or Goldman Sachs. Investments in the U.S. business would take away from investments in fast-growing economies, like South East Asia, where the Deutsche name commands a premium.
Counterparty Risk
To truly understand the counterparty risk associated with Deutsche Bank, we would have to imagine a scenario where the EU, the ECB and every single institution associated with Deutsche is thrown into chaos. This will not be allowed to happen regardless of whether or not Chancellor Angela Merkel continues to wield power.
When a rival financial institution or trader claims to be wary of taking on Deutsche as a counterparty, it benefits directly from doing so. A client is a better barometer and I speak with two. One, a single family office/asset manager I met in plush Mayfair environs, tells me they are «very happy» with the Deutsche Bank platform in Geneva they use for all execution. In this case, any risk is mitigated since assets are custodied elsewhere.
Large Line of Credit
The second, a large private banking client in Asia, tells me he hasn’t «for a second» worried about the risk associated with the bank – it has lent him tens of millions of dollars in the past and he continues to have a large line of credit. I hazard he is a far better judge of counterparty risk than some of the commentators I have heard.
Neither this publication nor I benefit from these views. And I would go so far as to venture that the financial services industry doesn’t benefit from any more Deutsche-bashing either.
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