Understanding The Impact Of Deutsche Bank’s Ill-Fated Postbank Acquisition

by Trefis Team
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Deutsche Bank’s (NYSE: DB) decision to acquire Postbank might have looked like a great move by the German banking giant in 2010. But with stricter regulatory requirements, a huge legal backlog and slow growth rates in the Eurozone complicating the bank’s path to recovery, integrating Postbank proved to be significant challenge for the bank.

Trefis looks at whether Deutsche Bank’s decision to acquire Postbank was a good move in an interactive dashboard. We detail the rationale behind the deal and explain how the acquisition failed to achieve the desired results. Not only has the acquisition failed to deliver the desired results, it has actually weighed on Deutsche Bank’s performance over the years. You can also find more Trefis Financial Services Data here 

Why Did Deutsche Bank Acquire Postbank?

  • Deutsche bank acquired Postbank in 2010. At the time Postbank was acquired, it was the largest retail bank in Germany.
  • To complete the acquisition, Deutsche Bank carried out the largest capital increase in its history with gross proceeds of €10.2 billion
  • The primary motive behind Deutsche Bank’s move was to increase its foothold in the retail banking operations, as Deutsche Bank was primarily an investment bank.
  • Deutsche Bank and Postbank were seen as complementary banks as they attracted different client groups
  • With two independent and ideally established nationwide brands, the acquisition was expected to cater to the banking needs of all groups of people.

However, things have not turned out the way Deutsche bank expected over the years. Postbank has under-performed the bank’s overall Private and Commercial Bank (PCB) operations. Moreover, it failed to retain its existing clients. As a result, Deutsche Bank decided to merge Postbank with its legacy PCB business to create a new single entity ‘Bank of Germany’ in 2018. Below, we analyse the pros and cons of Deutsche Bank’s move to acquire Postbank.

The acquisition resulted in some ready benefits for Deutsche Bank

#1. Postbank Provided A Boost To Deutsche Bank’s Retail Banking Revenues

This helped the bank develop a more diversified business model.

  • Prior to the acquisition of Postbank, Deutsche Bank’s Retail Bank contributed merely 24% of total revenues while the contribution of IB was more than 65%
  • Postbank helped DB’s Private & Commercial Bank revenue almost double from €7 billion in 2009 to €12.6 billion in 2011.
  • This helped the contribution of PCB to the top line reach a high of 38% – helping DB diversify its revenue streams

#2. Postbank had more than 14 million clients at the time of acquisition

This provided a boost to Deutsche Bank’s Loans and Deposit Balance

  • As mentioned earlier, DB was predominantly an Investment bank, because of which loans and deposits didn’t make up a large part of its balance sheet.
  • However, after the acquisition of Postbank, DB’s loan balance increased 60% to €412 billion while deposits soared by 75% to €600 billion

#3. Postbank’s acquisition also helped Deutsche Bank Improve its Common Equity Tier 1 ratio

Common Equity Tier I Capital Ratio = Adjusted Common Equity ÷ Risk Weighted Assets

  • One of the main benefits of acquiring Postbank was that it provided a boost to the bank’s CET1 ratio.
  • DB’s CET1 ratio improved from a low of 8.7% in 2009 to around 9.5% in 2011 as an increase in adjusted equity more than made up for increase in Risk-weighted assets

But with time, the division ended up weighing on Deutsche Bank’s performance

#1. Postbank’s Revenue Declined At A Faster Pace Than The PCB

  • Since 2011, PCB has lost more than €2.5 billion in total revenue at an average annual rate of 3.5%
  • Notably, soft economic conditions in Europe coupled with record low interest rates hurt revenues across the industry
  • But Postbank fared worse than Deutsche Bank’s existing PCB unit, with revenues declining at an average annual rate of 6.5% since 2011 – shedding more than €1.5 billion.
  • In other words, Postbank has been responsible for more than 60% of lost revenue since 2011

#2. As A Result, Postbank’s Share Of The Top Line Also Fell Over The Period 

  • Postbank was completely integrated into Deutsche Bank’s operations in 2011. At that time the contribution of Postbank to total revenues stood at 14%. However, due to below-par performance of the bank its contribution to total revenues declined to 11.8% in 2017.
  • On the contrary, the contribution of PCB to total revenues increased marginally from 38% in 2011 to 38.5% in 2017

#3. Moreover, Postbank Had Been Operating At A Lower Margin Than PCB

  • Postbank’s operating margin has consistently declined since 2011, falling from 16% in 2011 to less than 11% in 2016.
  • While the operating margins for DB’s Private & Commercial Bank has also declined, it had been operating at a much higher margin than Postbank.
  • As of 2016, PCB’s operating margin stood at 13%-almost 20% more than Postbank’s 10.9%

#4. Finally, Postbank’s Average Revenue Per Client Was Much Lower Than Deutsche Bank’s PCB Division

  • Postbank’s revenue per client declined from €333 in 2011 to about € 235 in 2014-implying a fall of nearly 30%
  • Before the acquisition PCB’s average revenue per client stood at €475-almost 50% more than Postbank’s
  • Although, after the acquisition, PCB’s average revenue per client gradually declined to €418 -but it was almost 80% higher than that of Postbank

Conclusion: Deutsche Bank Failed To Achieve Desired Results From Postbank Acquisition

  • Deutsche Bank clearly failed to achieve the objectives it had desired from its Postbank acquisition
  • Although the bank became the largest retail bank in Germany, Postbank’s revenue consistently declined and its profits tumbled.
  • The bank became too big to manage – leading to elevated costs and reduced profits.
  • Moreover while the other European Banks report much better operating margins for their retail operations, Deutsche Bank continues to struggle to manage its cost.
  • To summarize, the acquisition of Postbank failed to provide the desired benefits Deutsche Bank was hoping for.
  • Hence, it is no surprise that Deutsche Bank has decided to merge the two banks in a last-ditch effort to slash costs and derive cost synergies.
  • The critical thing, though, is for Deutsche Bank to implement these changes successfully – something it hasn’t been unable to do for the other restructuring plans it has proposed over the last several years. While the bank has taken a few steps in the right direction (including a reduction in 750 jobs in July as a part of the integration), what remains to be seen over subsequent quarters is if revenues will also recover.

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