Deutsche tests investor patience with no-surrender strategy
By Thomas Atkins and Kathrin Jones
FRANKFURT (Reuters) - Deutsche Bank's (DBKGn.DE: Quote) determination to be the last European in the upper echelons of global investment banking is an expensive waiting game for investors.
Germany's flagship lender is holding its ground against U.S. leaders such as JP Morgan (JPM.N: Quote) and Goldman Sachs (GS.N: Quote) in revenues, but its returns are trailing because it was not as quick to restructure and recapitalise in the wake of the financial crisis.
European rivals such as UBS UBSN.VX and Barclays (BARC.L: Quote) have seen their revenues fall as they have shrunk their bond trading desks, but their returns are in better shape.
Deutsche bets that its strategy, which is to vacuum up activities abandoned by retreating European competitors, will pay off when bond trading rebounds.
With interest rates set to remain at record lows for some time in Europe and a risk that litigation costs and regulatory scrutiny could eat up capital, it could be a long wait.
Investors are frustrated. They have seen returns diluted by a $12 billion rights issue this year as Deutsche restocked its balance sheet ahead of European stress tests.
Deutsche's return on equity of less than 3 percent in the first nine months of this year was far below the 12 percent it aims to reach in 2016 and a far cry from the 20 percent returns enjoyed before the crisis.
All banks are aiming for double digit returns given that the industry's cost of equity is around 10-12 percent. Continued...