Deutsche Bank is in such bad condition that towards the end of 2018 Charles Dupree, a senior investment banker at the Frankfurt-based company, recommended the bank be broken up. Years of struggles and failed turnaround plans suggest Dupree is correct.
Breaking up the bank would enable the profitable parts of the business the best chance of success, free from the investment bank business which has over recent years consumed more than half of the capital available to the bank.
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Deutsche Bank future: Investment side may need to be sold off
Bold though such a move would be, the attractiveness is derived from the near absence of alternatives that could reasonably be expected to restore past glories. Doing so would enable the investment banking part of the business to access its own funding sources.
A spate of bad news reports recently suggests not taking radical action will all but condemn the bank to muddle along and leave it vulnerable to another economic crisis. Annual revenues declined for the third consecutive years and the bank recently lost $1.6 billion on a single municipal bond trade dating from 2007.
Such is the scale of the problems facing the leadership team that the profitable parts of the business should be allowed to flourish without risking being dragged down by wider troubles at the business.
Hanging on to a failing investment bank that consumes so much of the bank’s capital hardly makes good business sense. A poor leverage ratio, a very low return-on-equity and repeated requests for more capital from shareholders point towards the sale of the investment bank to be in the interests of Deutsche Bank.
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By GlobalDataProtestations from CEO Christian Sewing that the bank was profitable in 2018 scarcely improved perceptions. The bank as a whole continues to lurch from one crisis to another and is vulnerable to an economic slowdown, falling global central bank liquidity and slowly rising interest rates.
Deutsche Bank merger with Commerzbank appears flawed
The bank currently has few options and pressure to merge with Commerzbank is mounting. However, this proposal comes with hefty problems. The price-to-book ratio for Deutsche Bank is 0.24, meaning investors consider the bank’s assets to be worth less than a quarter of what that bank itself asserts.
Yet the ratio for Commerzbank is scarcely any better, casting doubt on the efficacy of a potential merger. Both banks are labouring under obligations taken on as a result of the 2008/09 global economic crisis.
Creating a very large bank from two banks that are struggling and are loaded with assets that the financial markets are pessimistic about does not bode well for success.
Although business costs could be lowered following a merger, such a deal would not solve the fundamental problems Deutsche Bank is suffering from and could easily create new ones to contend with.
