European investment bankers are not quite ready to become extinct like the Irish elk or Balearic cave goat. At Deutsche Bank they raised third-quarter revenues 43 per cent to €2.4bn. Fixed-income traders thrashed US rivals, increasing sales by almost a half.
A sensible analogy is with a lynx cub produced through captive breeding. The event keeps hope alive, but conditions were artificial. Coronavirus has induced huge volatility and surges in financings and securities trading, all underpinned by state stimulus. In normal times you would not expect Deutsche’s investment bank to increase profits before tax 15 times to almost €1bn, 70 per cent of the divisional total before group overheads.
The result does however give chief executive Christian Sewing breathing space. He had retrenched in investment banking. The unit was the main source of risk-weighted assets for a non-core run-off unit now worth just €39bn within a group total of €325bn. But exposure to investment banking remains higher than purists wanted. Along with Barclays boss Jes Staley, another holdout, Mr Sewing can now point to the benefits of diversification at a time of rock-bottom lending rates.
The difficulty is in repeating the performance. Deutsche’s bond, rate and commodity traders have generally lagged US rivals, says Berenberg’s Eoin Mullany. It would be a stunning outcome if the investment bank could hold on to half its market share gains.
Even then, returns would look underwhelming, reflecting high capital costs. This blowout quarter, the investment bank made a return on tangible equity of 11.6 per cent. Deutsche’s group cost of equity — albeit an abstruse concept — must be about 11 per cent. For the volatile investment bank, the figure would be far steeper.
The post-crisis justification for investment banking is as an adjunct to corporate and private banking. Deutsche’s investment bank therefore shares implicitly in €216m of loan loss provisions at these sister units this quarter, even as it can expect them to generate future returns, however indirectly, from its capital burden.
Highly politicised European banking is a source of case studies not investment opportunities for Lex. At just one-third their book value, Deutsche shares are no exception. To invest, you would need a takeaway more compelling than this one: an animal that clings to its niche may eventually enjoy better conditions.
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