Regulators press Deutsche Bank to shrink US investment bank
Division must be reduced whether or not Commerzbank merger proceeds
Regulators are calling on Deutsche Bank to further shrink its US investment bank, increasing the pressure on chief executive Christian Sewing to take more decisive action at the failing unit.
The bank’s supervisors are concerned that the division remains too large and unprofitable and needs to be cut back, according to people familiar with the matter.
“We started to make our regulatory expectations [to shrink CIB operations] clear about two years ago, and we continue to have the view,” said a senior supervisory official.
The Financial Times first reported those concerns last year and they have been raised informally in discussions with senior Deutsche executives.
The senior official added that the watchdogs’ stance would not be affected by a potential tie-up with Commerzbank, which Deutsche has been evaluating since March.
One motivation for that possible deal is a hope that a large pool of retail deposits and a potential government stake in the enlarged lender would lower funding costs and reduce clients’ concerns over counterparty risk that are undermining its investment bank.
Deutsche said that it had reduced the size of its investment bank significantly, including reducing its debt levels by 13 per cent and its headcount by 7 per cent, as well as shifting resources to areas of strength such as transaction banking, foreign exchange and secured lending.
“These actions have already begun to yield results, and we believe they will lead to steady, sustainable improvements in our investment bank,” Deutsche said. “We are moving in the right direction.”
Senior officials at Deutsche’s European watchdogs are convinced, however, that the cuts have not gone far enough and expect further reductions.
Mr Sewing in February faced calls from four of the banks’ 10 largest shareholders to step up the restructuring of Deutsche’s corporate and investment bank.
However, chairman Paul Achleitner is still advocating a grand vision of turning Deutsche into a strong European alternative to US-based investment banks like JPMorgan and Goldman Sachs, according to people familiar with his view.
In 2018, the division spent 95 cents on costs for every euro in revenue generated and generated a return on equity of just 0.9 per cent. Analysts on average expect that the division’s income, which is down 31 per cent since 2015, will fall another 4 per cent this year.
“These issues won’t disappear in a merger,” said the senior official.
A person familiar with the discussions said: “The future of Deutsche’s investment bank is not a subject in the merger talks between the lenders.”
Deutsche Bank, Commerzbank, the European Central Bank, BaFin and the Bundesbank all declined to comment.