Question

How has the orientation of Deutsche Bank changed over time in terms of business segments and global nature? Why? In what data/statistics do you observe it? Do you agree with its strategy? Is Deutsche Bank the only bank that has increased its international exposure?

Answer 1

Deutsche Bank was founded in Berlin on 22nd January 1870 as a specialist bank for foreign trade. The bank’s statue stated, “The object of this company is to transact banking business of all kinds, in particular to promote and facilitate trade relations between Germany, other European countries, and overseas markets.” It was established to cater to investment as well as commercial banking needs. After World War I, inflation had spread throughout Germany due to the political and economic instability. The borrowers couldn’t pay off their debts and Deutsche Bank had to sell most of its foreign assets. Germany invaded countries during the Great Depression of the 1930s and Deutsche Bank wasn’t far behind. By the end of World War II, all the money and holdings were transferred from the Jews to the German government. Deutsche Bank was split into 10 different banks after World War II and the name was outlawed. 10 years later, former parts of Dusseldorf, Frankfurt, Munich and Hamburg were merged and allowed to operate under the old name.

As the financial situation recovered across the world, Deutsche Bank started expanding its operations in foreign countries. They were operating in 70 countries by 2001. Deutsche Bank concentrated on Investment Banking activities as compared to the traditional commercial banking which showed in their revenues. Approximately 62% of bank’s revenue in 2007 was generated from investment banking activities.

The historic financials of Deutsche Bank show that the bank performed much better in terms of ROE as compared to ROA performance. The bank had the highest ROE as compared to any other bank. The various graphs illustrate that the return on equity was impressive and increased rapidly every year. The ROA wasn’t as impressive as the ROE. This meant that Deutsche bank was profitable by increasing their leverage. This was at the cost of an increasing risk because high leverage translates to high risk as they borrowed money instead of using their assets. JP Morgan Chase had twice the ROA than Deutsche Bank in 2006. Though both ROA and ROE are equivalent in increasing the profitability, a bank cannot afford to concentrate and increase just one. Hence, Deutsche Bank needs to accumulate assets to decrease its burden on leverage risk.

The European Sovereign debt crisis had shaken the world. Deutsche Bank’s was no different as its profits were shaken and were on a low. The Basel III was introduced to improve the regulatory framework for banks. According to Basel III, the banks were required to maintain tier 1 equity capital of 9.5% to 13.5% of risk-weighted assets which earlier was 4%. There were certain other regulations and risk weights assigned to different classes. All these were required to be increased as per the norms of Basel III. The banks had to start abiding by the Basel III regulations from 2013 and to be fully complied by 2019. Banks usually use one of the following methods to finance asset growth on balance sheet: i- Use previous earnings, ii- issue new capital or iii- borrow debt. Issuing new capital leads to diluting the equity value of existing shareholders and borrowing debt leads to increased leverage which again is risky. To comply with the norms of Basel III, Deutsche bank laid off many of its employees and increased their stake to 93.7% in Germany based Postbank in February 2012.