(Bloomberg) — Deutsche Bank AG is winning support from German politicians for a plan to transform the countrys biggest bank into a company more like Goldman Sachs Group Inc.
That would be the result of an option the firm is weighing as it seeks to bolster capital levels and profitability, according to a person with knowledge of the matter, who asked to remain anonymous because the talks are confidential. Exiting retail banking to focus on global fund management and investment banking would cut fewer jobs and deliver the quickest boost to returns among three scenarios under review, said the person.
Deutsche Bank co-Chief Executive Officers Anshu Jain and Juergen Fitschen are revamping their strategy after the stock fell 24 percent last year, the most among the top investment banks. At stake for Germany, the worlds third-biggest exporter, is maintaining a competitive advantage by having a domestic corporate and investment bank with global reach that can offer local companies access to capital markets.
Deutsche Bank is Germanys only global player in banking, Michael Fuchs, the deputy parliamentary leader of Chancellor Angela Merkels Christian Democratic Union said by phone from Berlin. If they decide to restructure their business, we should support them.
Politically Acceptable
Deutsche Bank executives briefed labor and shareholder representatives on the companys options at a meeting on Friday, said two people with knowledge of the matter.
The lender would still shrink its investment bank, which is Europes largest, in all three scenarios it is considering, according to one of the people. The bank may pare its interest- rate trading business and the prime finance activities that cater to hedge funds, the person said.
Ronald Weichert, a spokesman for Deutsche Bank in Frankfurt, declined to comment on which strategic options the bank is considering and on the comments made by German politicians. The company said on Friday that it would present the results of its strategy review in the second quarter. A spokesman for the Finance Ministry in Berlin also declined to comment.
Politicians might have an interest in Deutsche Banks plan because Germany is its single biggest market, making up 34 percent of the banks 31.9 billion euros ($35.1 billion) of revenue last year and accounting for 46 percent of its 98,138 staff at the end of December, company filings show.
Deposit Dependence
If Deutsche Bank has concluded that its economically better to sell its consumer unit, we have to accept this, said Ingrid Arndt-Brauer, chairwoman of the parliamentary finance committee and a member of Merkels Social Democratic Party coalition partners.
Goldman Sachs, which has outperformed Deutsche Bank in the past, could serve as a template for the German lender because its shown that investors reward trading returns provided the bank is sufficiently capitalized, according to Jefferies Group LLC analyst Omar Fall, who recommends investors buy Deutsche Bank shares.
While the two banks already compete in asset management, investment banking and trading, Goldman Sachs has stayed out of retail banking. By following the Goldman Sachs model, Deutsche Bank would lose funding from individuals savings and become more dependent on deposits from wealth management clients. Unlike Goldman Sachs, Deutsche Bank also has a transaction banking unit that holds corporate cash.
Postbank Reversal
The sale of consumer businesses would see a significant wedge of stable funding exit the bank, Bank of America Corp. analysts including Andrew Stimpson said in a note to clients Tuesday. That would be negative for new funding ratios and also for credit rating agencies, they wrote.
Just five years ago, Deutsche Bank acquired German consumer lender Deutsche Postbank AG to reduce its dependence on sometimes volatile earnings from investment banking.
The collapses of Bear Stearns Cos. and Lehman Brothers Holdings Inc. during the financial crisis illustrated the risk of relying on market funding instead of government-backed deposits. One week after Lehmans September 2008 bankruptcy, both Goldman Sachs and Morgan Stanley converted to banks, gaining oversight from the U.S. Federal Reserve, and pledged to grow their deposit bases. The banks have since built up deposits through their wealth management arms.
Leverage Boost
Still, selling part or all of the consumer business would help Deutsche Bank increase its leverage ratio, a measure of financial strength.
The bank is probably unable to meet the 4 percent leverage ratio it should be targeting as a minimum and could increase that to more than 4.5 percent by exiting German consumer banking, Citigroup Inc. analyst Kinner Lakhani wrote in an e- mailed report on Thursday.
A significant investment bank restructuring could achieve a similar ratio, albeit with high execution risk given the starting point of a leading franchise, he wrote.
Jain, Fitschen and supervisory board Chairman Paul Achleitner have argued the need for the firm to maintain an investment banking business in speeches this month. European companies will increasingly rely on selling securities to fund their activities as banks rein in lending, they said.
Client Backing
Keeping Deutsche Bank global is also in the interest of corporate Germany. The lender was set up in 1870 in the runup to German unification to promote trade and challenge British banks which dominated the financing of Germanys foreign trade, according to the companys website. Germany was the largest exporter after the U.S. and China in 2013, data compiled by Bloomberg show.
Several of Deutsche Banks clients and investors have also voiced support for its commitment to investment banking.
Europe needs banks that can offer corporate clients services globally, BlackRock Inc. CEO Laurence Fink told Der Spiegel in an interview published earlier this month. His firm, which is Deutsche Banks largest shareholder, is also the banks biggest client, Jain has said.
BASF SE, the worlds biggest chemicals maker, wants to continue to be able to turn to Deutsche Bank rather than to its U.S. competitors for financial services, CEO Kurt Bock told Jain on a panel at a conference in Dusseldorf in September.
ECB Role
We as a global company also need a German-based global bank, Bock said. We do not want to go to London or New York for conducting business because there are lots of critical things wed like to discuss first inhouse, so to say.
The medium-sized manufacturers that make up the backbone of Germanys economy also need Deutsche Banks services, according to Klaus Rosenfeld, CEO of Schaeffler AG, a family-owned company which is the second-largest maker of industrial bearings. Companies rely on banks to hedge their risk, manage deposits and advise them on strategy, he said at a conference in Frankfurt in November.
Endorsement by German politicians may not be as significant as it used to be since the European Central Bank assumed supervision of the euro areas banks from national regulators last year, said Hans-Peter Burghof, a professor of banking and finance at the University of Hohenheim in Stuttgart, Germany. The ECBs Single Supervisory Mechanism is assessing how sustainable banks business models may be as part of its oversight role.
Stock Gain
While Deutsche Bank has outperformed its top eight global investment banking competitors with a 25 percent surge this year, it still trades at the lowest price to tangible book value of the group. That indicates that its worth less than investors would expect to receive if the firm liquidated its assets.
Consumer banking is a key part of Deutsche Banks German identity. Severing one of the banks roots in Germany would move it closer to the world of international investment banking Jain, a former derivatives salesman, thrived in since joining Deutsche Bank in 1995 from Merrill Lynch & Co.
I dont know if Jain feels completely comfortable at the head of Deutsche Bank with its current set up, said Michael Huenseler, who helps manage about 14 billion euros at Assenagon Asset Management SA in Munich and is one of the lenders top 20 investors. He doesnt necessarily need consumer banking for his plans, but it isnt that easy to position Deutsche Bank as an investment bank.
