As the financial system stabilises after the recent crisis, three distinct business models are emerging. First, focused retail institutions with a specific offering of products and services, such as American regional banks and Europe’s savings banks. Second, investment banks which also operate asset management businesses and private equity investments. And finally, global universal banks which provide a fully-integrated set of products and services, including both investment and commercial banking, transaction banking, asset management and retail banking, and which operate in all the major business centres of the world.

For universal banks today, the debate is about much more than challenges and opportunities. It’s rather more fundamental than that. Indeed, for more than a century, universal banking has served the world economy and Europe in many ways and now a critical decision seems to be unavoidable. On the one hand, universal banking can continue to contribute at a crucial time for Europe, while on the other one, that model can be relegated to extinction.


A bit of history…

Created in the 19th century, universal banking is not a new phenomenon also in Germany. Indeed, as the 1870s marked the rise of Germany as a unified, industrial power, this economic boom and process of industrialisation was financed by a combination of lending and capital market access. At that time, however, German companies had to finance much of their international trade through English or French banks, which enjoyed a strong hegemony. German firms were therefore disadvantaged since their bonds suffered a discount to those issued by their foreign competitors. That prompted the private banker Adelbert Delbrück and the politician and currency expert Ludwig Bamberger together with the industrialist Georg von Siemens to found Deutsche Bank in 1870. Indeed, also the statute laid great stress on foreign business: “The object of the company is to transact banking business of all kinds, in particular to promote and facilitate trade relations between Germany, other European countries and overseas market.”. Later on, universal banking played a key role in financing the rapid reconstruction and development of the economies of West Germany and Austria after World War II and the economic reunification of Germany after the fall of the Berlin wall.


…and now?

So, why is this model now being challenged? Unfortunately, the answer seems to be: for good reasons. Indeed, in the immediate aftermath of the global financial crisis, there was a large crowd of bankers reaffirming their commitment to global universal banking because it helped smooth revenue volatility and created valuable synergies. A host of regulation, from structural reform to tougher capital, leverage and liquidity ratios, has changed that. However, there are still concerns that the largest banking groups remain too large and complex to manage, monitor, and supervise in good times and, possibly, challenging to resolve in bad times. In a lot of ways, banks may liken the past six years to a turbulent ride on a small aircraft. As we move through 2015, firms may finally be at the point of boosting profitability, thus taking off for a less bouncy ride. That’s not to say challenges aren’t ahead, but rather a new flight plan is in store.

Transformation is necessary because banks face an array of stakeholder pressures. They must find a way to deliver improved performance for investors who are tired of high volatility but low returns on equity. In doing so, banks will have to fight with a low-growth, low-rates and quasi-deflationary environment across many advanced countries and slowing growth, fuelled with a rapid increase in indebtedness, in emerging countries. Simplification and transformation appear to be the only way to deliver shareholders value. As banks position themselves to deal with an era of low growth, they will have to continue to adapt to a post-financial crisis environment, where an often divergent global regulatory reform agenda shows no signs of fading and customer trust has to be regained.

Global universal banks were the big winners of share in the aftermath of the global financial crisis. Indeed, according to Oliver Wyman and Morgan Stanley, the market share for the group, made up of 5 of the top 6 global banks by revenue, jumped from 24% in 2006 to 42% in 2011. However, pressures on this group are mounting since revenue pools continue to shift away from their areas of advantage in FICC, and towards IBD and equities, while the costs of size and complexity are increasing. “Global Investment Banks remain cyclically advantaged, benefiting from stronger growth in equities and investment banking, where they have built hard-to-assail leadership positions. Equally, this business mix also makes this group more exposed to the downside risks”.



In this context, universal models are increasingly under pressure to prove the value of synergies and linkages to the group. Indeed, the costs of size and complexity are rising. G-SIFI rules and regulatory balkanisation are pushing up capital and funding costs, while structural reforms are limiting the number of activities that can be carried out by universal banks. As a result it is likely that while a small number of global banks can still deliver higher returns through consolidating share across a broad business footprint, the execution risks of this approach are high and there is significant investor pressure to demonstrate the value of the global franchise. For many others, a much more selective approach seems to be favoured, focusing around areas of comparative advantage. Moreover, the complexity of bank infrastructures means the industry has a poor record in delivering economies of scale in technology and operations. The largest banks, many of which have grown through acquisitions, often have the most complex and challenging infrastructure environments. Smaller, more agile banks could have opportunity to take share in areas of edge and improve profitability.


The Announcement

On March 3, Citigroup Inc. agreed to sell its wholly-owned subsidiary OneMain Financial, provider of subprime loans, to Springleaf Holdings in a $4.3bn all-cash transaction that will bring the American giant towards a leaner business model. A month later, on the other side of the ocean, another big player of the financial industry is seeking to spin-off one of its lending unit. Indeed, Deutsche Bank AG is currently exploring different alternatives that will see the German giant disinvesting from its retail-focused subsidiary, Postbank.


About Postbank

Deutsche Postbank AG is a German retail bank with headquarters in Bonn. Postbank was formed from the demerger of the postal savings division of Deutsche Bundespost in 1990. It became a wholly owned subsidiary of Deutsche Post in 1999, and was partially spun out on the Frankfurt Stock Exchange in 2004. In September 2008 Deutsche Post sold 30% of its stake to Deutsche Bank for a €2.8bn consideration. Subsequently, Deutsche Bank gained a majority stake in the firm through a tender offer completed in December 2010 and exercised its option to acquire the remainder of Deutsche Post’s holding in 2012 for a total value of more than €6bn.


Two alternative options

Despite a contribution of 12%, roughly €400m, to Deutsche Bank’s last year pre-tax profit, the German giant is leaning toward the disposal of Postbank. The board has evaluated two alternative options. Under the first scenario, Deutsche would have sold shares in Postbank, 6% of which remains listed, within the next 18 months and refocused its remaining own-brand retail business on more affluent clients. At the same time, it would have cut a fifth of its investment bank’s assets (roughly €160bn), especially in areas such as trading business and prime brokerage, both hit particularly hard by new Basel III capital rules. The second and more radical option would have seen Deutsche Bank disposing of all retail banking, which includes both the bank’s own retail operations and Postbank. However, a majority on Deutsche Bank’s executive board seemed to be reluctant to make such a move since, apparently, it would pose funding problems for the remaining operations.


What is DB doing? Why is it so?

After weeks of uncertainty, at the analyst conference call held on April 27 the board has revealed its decision: Deutsche Bank, currently holding 98,6% of Postbank shares, will squeeze out the remaining minority and plans to remove the retail subsidiary from its balance sheet by the end of 2016, either through a re-IPO or via a private transaction with an interested bidder. Looking at DB’s Q1 numbers we notice that, between 2007 and 2015 Deutsche Bank has increased the proportion of revenues coming from its commercial branch (from 11% up to more than 40%) but it has done it at the expenses of the Sales & Trading division, whose revenues now account for 35% down from more than 50% in 2007. As a matter of fact, DB’s ability to fully realize value out of Postbank’s acquisition eroded quickly in the face of the changed regulatory environment, which has significantly decreased retail’s revenues and margins. On the one hand, the possibility of cross-selling products from DB’s sales department to Postbank’s retail clients and has been limited by the new regulation and this has significantly reduced, almost halved, the €1bn revenues synergies that were projected in 2012. On the other hand, these type of clients are now considered much more risky than corporates and HNWI and thus require a higher amount of capital, which lowers their profitability.


Pros and Cons

But are we really sure this is really the best solution? Both options, of course, had pros and cons. If Deutsche Bank sold only Postbank, it would have to reorganize and restructure its own network of 700 retail branches and, following the move of UniCredit’s German unit HVB, it would have to emphasize its online banking services to attract and retain more costumers. Additionally, this first option would have consequences also for Deutsche’s Investment banking division, where around €200bn of gross assets should be divested in order to achieve a target leverage ratio of 5% by 2020, in line with main competitors. The alternative and braver option – spinning off the entire retail operation – would also boost the bank’s profitability while transforming Deutsche Bank into a European-based version of Goldman Sachs Group, almost fully reliant on investment banking. However, even though this strategy was initially preferred by a large part of the board, loosing €300bn deposits – roughly 33% of the total – would pose serious concerns in terms of funding needs, also considering that regulators and rating agencies often encourage banks to fund themselves through more stable sources such as client deposits or longer term debt instruments. Of course, in both cases the divestitures would have taken away a stable source of income for the giant German lender but, on the other hand, it should improve its profitability, since margins are particularly low in the retail sector, and make it easier to meet capital-adequacy requirements. Indeed, news of a potential sale of Postbank surfaced in mid-December, surged Deutsche Bank’s shares 32%, catching up with the broader banking sector in the Stoxx 600, which gained 15% in that time. This signals that the market is appreciating this refocusing strategy but more importantly that, in one way, it still believes that the so called “one-stop shop” model is still viable and able to generate shareholders value.

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