Deutsche Bank's investment bank has Barclays' problem
As the two leading European investment banks, Deutsche Bank and Barclays have similarities. Both have big fixed income sales and trading businesses. Both have challenges in 2024, because both have investment banks that are not earning their cost of capital.
As we noted in November, Barclays' reported aspiration to earn a consistent 14-15% return on equity at its investment bank, looks
unattainable ambitious given that it only once earned this kind of RoE in the past eight years, and that was in the frenzied good times of 2021. In normal periods, the RoE in Barclays' investment bank has lurked at 10%, or below.
At Deutsche's investment bank, things look even more challenged. As the chart below shows, the return on equity at Deutsche's investment bank recovered from its 2019 nadir in 2020, 2021 and 2022, but fell back again in 2023. At no point during the last five years has it exceeded 10%, even after CEO Christian Sewing's restructuring.
It's notable, therefore, that a 10% RoE in the investment bank is Deutsche's declared aspiration. Speaking yesterday, Deutsche Bank CFO James Von Moltke, said definitively that "the IB needs to be above 10% in 2025," and that he's confident of achieving that.
How? Like Barclays, Deutsche isn't planning to cut front office revenue generators, but to go after costs in the middle and back office. Deutsche said yesterday that it will cut 3,500 jobs across the bank in the next two years. Sewing said the bank plans to remove €700m of costs from things like "application decommissioning and other operating model improvements," and €300m from "simplified workflows and automation" and that the jobs will go from "non-client facing areas." At the same time, he's hopeful of a revenue rebound in the investment bank, where Deutsche has positioned itself for the much awaited recovery.
Is this doable? Possibly, if revenues bounce back, but it's noticeable that even in the go-go years of the pandemic, Deutsche's investment bank didn't perform according to the current plan. A lot is riding on a hoped-for new advisory boom, where the cost of capital is low, and the returns are high. Rebecca Short, Deutsche's new COO, will also need to do her bit to cut costs. Sewing said yesterday that the management board is "constantly" monitoring her progress, on a daily and weekly basis.
If revenues or Short fall short, there's always another alternative. Deutsche cut the capital allocated to its investment bank, which has been remarkably stable, even as the RoE has faltered.
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