Deutsche Bank’s Business Model Has Changed Considerably Over The Last Decade, And More Changes Are Underway

by Trefis Team
Deutsche Bank
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Deutsche Bank (NYSE:DB) has revamped its business model several times after the economic downturn. Despite several attempts, the bank has been largely unsuccessful in reviving its profits. While the bank’s European and American counterparts have been able to demonstrate strong investor returns to shareholders for several years now, Deutsche Bank continues to struggle and recently announced plans to implement additional cuts to its equity trading business.

Trefis has highlighted the changes in the bank’s investment banking business in the interactive dashboard- How Has Deutsche Bank’s Investment Banking Business Changed Over The Last 10 Years, And What’s The Forecast Over The Next 5 Years?  You can modify any of our key drivers to gauge the impact changes would have on its valuation. Additionally, you can see more Trefis data for financial services companies here

How Has Deutsche Bank’s Revenue Composition Changed Over The Last Decade And What’s The Forecast?

  • Before the financial crisis of 2008 the bank’s Investment Banking Division ( Sales & Trading and Advisory & Underwriting Services) contributed roughly 60% to Deutsche Bank’s total revenues.
  • After the crisis, DB decided to scale back its trading business and increased its focus on other stable revenue drivers. As evident from 2014 numbers, Deutsche Bank’s Investment Banking contribution to total revenues plunged to 43%, with trading desk constituting about 34% to total revenues.
  • IB division now accounts for roughly 36% of DB’s total revenues while Trading division’s contribution has been reduced to less than 30%.
  • The recently announced cuts to equity trading will drag the contribution of investment banking revenues further over coming years. Trefis projects the contribution figure to decline to around 26% in five years.

How Have Key Operating Metrics For Deutsche Bank’s Investment Banking Business Changed Over The Years?

  • As evident from the chart below, the CIB division’s revenues reached a high of $23.3 billion in 2010 as upbeat market conditions helped the sales and trading desk achieve record revenues. However, since 2010, CIB revenues have declined at an average annual rate of 7% and now stand at below $11 billion.
  • Moreover, the bank’s trading portfolio has taken a hit since the financial crisis, as a result, total trading assets have declined at an average annual rate of 12% since 2007 and as of 2018 total trading assets stood at just $194 billion.
  • Large costs related to its long-term reorganization plan coupled with huge settlement costs from its outstanding legal issues has reduced the division’s margin from about 29% in 2014 to just 4% in 2018. Trefis expects the margin to improve and reach about 15% in the next 5 years – a figure that is about 20 percentage points below its pre-recession level.

How Has The Bank’s Sales & Trading Revenues and Yield Changed Over The Last Decade?

  • Deutsche Bank’s decision to scale back its trading business has resulted in revenues declining from $20 billion in 2010 to about $8.5 billion in 2018. The two trading desks now contributes less than 30% to total revenues as opposed to about 53% a decade ago. Trefis estimates this contribution to decline to around 26% in 2024.
  • Moreover, Deutsche Bank’s FICC trading yield has averaged around 5% over the last decade. Although, the bank’s FICC trading revenues have been reduced by more than 50% since 2010, the bank has been able to keep its FICC yield intact.
  • Further, the bank’s equity yield has largely been upbeat since the crisis, averaging around 8%.

How Does The Change In Sales & Trading Revenues For Deutsche Bank Compare With That For Its Peers?

  • In 2012, UBS announced that the investment bank would focus on its traditional strengths and exit much of its fixed-income trading business that was not economically profitable. Since 2012, UBS has drastically reduced its trading operations and trading revenues now account for just 18% of total revenues.
  • Credit Suisse underwent a similar restructuring along the lines of its larger Swiss peer UBS. Credit Suisse reduced its trading activities largely after 2015. As a result, the trading division now contributes 24% of Credit Suisse’s total revenues as compared to almost 34% before the crisis.
  • JPMorgan, on the other hand, has continued to achieve growth across operations. In fact the contribution of trading revenues to the bank’s total revenues has increased slightly after the financial-crisis due to the acquisition of Bear Stearns at the peak of the downturn. Trading revenues now account for about 18% of the bank’s total revenues.

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