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March 28, 2012

New Leading Bank in Europe

Vedomosti
March 28, 2012

By Mikhail Overchenko

Deutsche Bank becomes the largest bank in Europe in terms of total assets. According to Bloomberg, Deutsche Bank’s assets increased by 14 percent up to 2.16 trillion euro ($2.88 trillion) in 2011, the bank left behind BNP Paribas. The assets of the French bank, the leader in 2010, fell 1.7 percent down to 1.97 trillion euro ($2.63 trillion).

Deutsche Bank was the largest bank in Europe last time in 2006. Today it leaves behind not only European, but American competitors as well: assets at the largest bank of the USA, JPMorgan Chase & Co., amounted to $2.27 trillion after a 7 percent rise.

The policy of Josef Ackermann, Chief Executive Officer, enabled Deutsche Bank to pull ahead. Josef Ackermann considers the regulators’ wish to limit bank size to be incorrect. “The problem is not in the size of the bank, but in the banks interconnection”, said Ackermann to the Financial Times in July 2009, remarking that Lehman Brothers Holdings, Inc., the American investment bank, and Hypo Real Estate Holding AG, the German mortgage bank, collapsed during the crisis, weren’t among the largest ones.

Since the end of 2009, Deutsche Bank has increased its assets by 44 percent, while nine other largest European banks on the average showed a 5 percent rise. Massive changes in the business sphere undertaken by world banks helped along to increase balance sheet of Deutsche Bank: many banks reduced their assets and liquidated entire divisions. Royal Bank of Scotland reduced the assets of the invest banking unit by £70 billion ($111.4 billion) over the past six months, and the Swiss UBS cuts the operations of its invest banking unit by refusing fixed-income papers trading and non-interchange transactions with securities. And this process tends to continue. Amount of finance on the balance sheets of the investment banks within the next two years shall reduce by $1 trillion, or by 7 percent due to strengthening of requirements to capital and funding costs increase, - says the yesterday published report of Morgan Stanley bank and Oliver Wyman consulting firm.

Balance Sheet of Deutsche Bank now is more than 80 percent as big as Germany’s GDP. The German lender is the second-most leveraged among the 10 biggest European banks and the eighth-most at capital adequacy (although Deutsche Bank increased its Core Tier 1 capital ratio, a measure of financial strength that takes into account risk- weightings assigned to various assets, up to 10.8 percent by the end of 2011 from 7 percent at the end of 2008).

“Deutsche Bank has been pretty decidedly opposed to reducing its balance sheet, and it’s understandable: The higher your leverage, the higher the returns when times are good. They want to cut as little as possible to keep doing as much business as possible”, said Lutz Roehmeyer, who helps manage assets at Landesbank Berlin Investment. The bank is able to maintain less capital than peers and borrow more to enhance returns because investors believe the German government would never let it fail, Roehmeyer said.

“High loyalty of clients helps the bank at “doing as much business as possible” as well. Deutsche Bank did not participate in two tenders for three year loans organized by European Central Bank in December and February. “The fact that we have never taken any money from the government, made us so attractive from a reputational point of view for many clients worldwide, that we do not want to refuse it”, said Ackermann after the first tender. Meanwhile, the first time 523 banks took 489 billion euro, and the second time 800 banks drew 529.5 billion euro.

But an aggressive strategy has an influence on the market capitalization of Deutsche Bank: it amounts only to 36 billion euro ($48.1 billion), and the price-to-book ratio – the proportion of market capitalization to shareholders' equity (i.e. how much the shareholders get in case of bank closing) is 0.65. Deutsche Bank’s is the forty fourth among the 50 global banks with the highest market capitalization, data compiled by Bloomberg show. “There’s no doubt that leverage and lack of capital are impacting Deutsche Bank’s valuation,” said Christopher Wheeler, a banking analyst at Mediobanca SpA. A week ago, when Deutsche Bank informed, that it had valued the judicial risk at 3 billion euro, Wheeler expressed his concern if the bank has enough funds to make payments under lawsuits (claims in the USA with regard to cases of high-risk mortgage bonds sales) and that this payments shall not cause losses to its activity. Deutsche Bank has to accumulate 10-15 billion euro to fulfill prospective requirements to the additional capital of strategic banks; therefore payments of billions of dollars may complicate this task.

Market capitalization of HSBC Holdings plc, the largest European bank in terms of this index, amounts to $163 billion, and the proportion of capitalization to equity equals to 1.03.



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