John, I’m only dancing
Deutsche Bank investors need to hope that John Cryan is not Chuck Prince in disguise. The German lender’s chief executive used fourth-quarter results on Jan. 28 to say he was adding rainmakers and risk and was “unshakeably optimistic” – despite a rotten three months in investment banking. It all sounds uncomfortably similar to the ex-Citigroup boss’ infamous 2007 determination to keep extending credit – or “dancing” in his phrase – as subprime wobbles turned to crisis.
Deutsche’s big bet on investment banking over the last couple of years hasn’t worked out thus far. Former co-Chief Executive Anshu Jain envisaged Deutsche Bank being a net winner in wholesale finance as the fallout from the crisis forced rivals to quit. But Deutsche’s investment banking division posted a 1.15 billion euro pre-tax loss in the fourth quarter. Debt and equity trading revenue fell by a fifth from the same period in 2014 – worrying, given that the top five Wall Street banks posted an aggregate 2.5 percent rise.
Cryan’s decision to plough more resources into the misfiring unit may be born out of a lack of ready alternatives. Transaction banking is improving and is the one business where Deutsche Bank made a respectable return on equity in the fourth quarter. But retail banking and asset-gathering turned in poor performances.
The trouble is that with costs and headcount still rising, Deutsche can ill afford to break the bank with new hires. Costs rose 40 percent in the three months to December, and even after excluding litigation, restructuring and other one-offs, expenses still wiped out revenue.
Perhaps Cryan will be proved right in his view that investment banking’s dog days are merely part of a pronounced cyclical downturn. Indeed, Deutsche has said that the start of this year has been much better.
But the market’s irrationality could outlast Deutsche’s staying power. The bank’s shares have at times in the last few weeks felt like they were in freefall. Some investors hoped that Deutsche could become the JPMorgan of Europe – a diversified, commercial bank less reliant on investment banking. But Deutsche’s market capitalisation is an eighth of its U.S. peer’s and barely more than a tenth of Wells Fargo’s. With Cryan recommitting to investment banking, that looks unlikely to change soon.