After years of investment, brawn, brains and luck, Deutsche Bank has arguably won Europe’s investment banking crown. Now, as UBS retreats from full-service investment banking, the German bank wants to capitalise on the latest round of post-Lehman sector consolidation. Profits, released on Tuesday, may be subdued – third-quarter net income rose only 3 per cent on a year ago. But Deutsche is solid across the board with scale where it matters. The question is whether investment banking performance can be sustained.
Sure, revenue from fixed income, currencies and commodities was more than two-thirds higher than a year ago at €2.5bn, and equities were up by a similar proportion. Deutsche acknowledged the benefit of central bank stimulus measures. But the investment bank’s cost-to-income ratio, at 78 per cent in spite of rising revenue, is high. This partially reflects restructuring costs, but Deutsche does seem to be paying up to create the extra capacity needed to profit as others surrender. Fine, but such a strategy requires cutting variable costs (staff) fast if the downturn deepens.
Nor is shrinking a guaranteed winner – UBS’s fallback, wealth management, reported a flat gross margin of just 89 basis points on Tuesday. Yet Deutsche recognises that it is too reliant on investment banking. Its own fallback is German retail and corporate banking, whose risk profile lets it run a peer-trailing fully loaded Basel III core tier one capital ratio of 7.2 per cent. Investors who want more will have to wait.