JP Morgan Chase & Co. Analysts Say Deutsche Bank AG (USA) Should Shrink Units.
JP Morgan Chase & Co has advised Deutsche Bank to decrease its investment and consumer banking businesses. The biggest bank of Germany is looking to reduce its cost and expenses by nearly $3.4 billion till 2017, which will help the bank to lower the return on equity.
Mr. Ranjan and Mr. Abouhossein wrote, “We believe management understands the need to adjust its business model strategically in the new regulatory world in investment banking as well as poorly performing retail banking,”
As per the analysts, if the German bank decreases its Postbank arm by at least 44%, it will lay the ground for them to reduce its exposure to leverage by 78% in consumer banking segment. The suggestion also includes selling its business to different countries such as Spain, Poland and Italy. Inside the unit of investment banking services, the bank can lessen its asset leverage by almost 14%. During this time the bank can do its currency trading and fixed income business.
JP Morgan also stated that Deutsche bank should sell its ownership in Huaxia Bank of China and should free its stuck capital. The total market value of the stake in Huaxia accounts for $3.61 billion.
On Tuesday, Anshu Jain –AG’s and co-CEO of Deutsche Bank said that its main objective is to continue working as a global investment bank as European firms required bond market access and for that they cannot rely on United States banks. He further said, Europe’s [economy] needs a better balance between bank lending and capital markets. Deutsche Bank will be part of that…The logic [for Europe] is inescapable: Leverage ratio requirements go up, [we see] tougher TLAC [total loss absorbing capital demands]. [So] I don’t see European banks balance sheets,”
As reported by WSJ that the German bank is interesting in spinning off its Postbank sector and planning to curtail investments which are not much profitable.
The Federal Reserve System conducts a stress test every year to inspect internal control and capital plans of the banks to make sure that they are ready to work in a proposed economic slump. The CCAR test works in two mechanisms, which are quantitative and qualitative. Deutsche Bank was able to get through the first round that measure the minimum capital requirement which was set by the Fed’s. The German bank has also passed a parallel test by the ECB, so it left everyone without a doubt that the bank has sufficient level of capital. However, in the second round where management of risk is checked the bank did not pass the test, which was expected.
According to thirty analysts polled by Bloomberg, 19 rated the stock of Deutsche Bank as Buy, 11 have given a rating of Sell.