Saturday, February 05, 2005
take that!
Embracing Reality at a Subdued Deutsche Bank
By MARK LANDLER P
ublished: February 4, 2005
RANKFURT, Feb. 3 - A year ago, Deutsche Bank was the subject of some of the hottest rumors on the Wall Street grapevine - a global financial competitor just itching to merge, buy or be bought. On Thursday, as the bank presented its 2004 financial results and laid out its plans for this year, the lack of buzz was palpable.
None of the rumored deals ever materialized, and the bank's chief executive, Josef Ackermann, spent most of Thursday's session detailing cost-cutting plans and Deutsche Bank's renewed focus on Germany. "We are not empire builders," he said in reply to one more question about deals. "We are here to make the bank as profitable as possible. We don't make acquisitions that are not in the interest of the shareholder."
Few analysts think that Mr. Ackermann, a Swiss-born investment banker who has run the bank since 2002, has lost his appetite for deal making. But they say the reality of Deutsche Bank's position, with higher costs and a lower market value than its American or British peers, has left it with few ways to seize the initiative in a consolidating industry.
Deutsche Bank is also hurt by a broader stagnation in German banking - no longer in crisis but still fragmented, stifled by regulation and unattractive to foreign banks. Credit Suisse, a rumored merger partner, recently ruled out a deal in Germany.
Mr. Ackermann expressed frustration with his bank's market capitalization of 35.5 billion euros ($46 billion), which is less than a fifth that of the world leader, Citigroup. Deutsche Bank explored the idea of merging with Citigroup early last year, but a deal was scuttled by political concerns in Germany because Citigroup would have ended up swallowing Deutsche Bank.
"If there were to be new discussions," said Simon Adamson, an analyst at the research firm CreditSights, "they would like to be in a stronger position, and a stronger position would imply a higher cap."
Mr. Ackermann's goal is to vault Deutsche Bank into the world's top 10 in market capitalization. It is currently ranked 23rd, trailing the likes of U.S. Bancorp of Minneapolis. Ranked by assets, Deutsche Bank is the world's sixth-largest bank, behind HSBC.
To close the gap between what it owns and how it is valued by the market, Mr. Ackermann has promised to deliver a pretax return on equity of 25 percent by the end of this year. In 2004, the bank improved its return on equity to 17 percent from 10 percent the previous year.
"This is very much a make-or-break year for them," Mr. Adamson said. "They are desperately trying to reach this 25 percent."
He and other analysts said it might be a stretch, given the weakness of Deutsche Bank's home market, the uneven growth of its trading businesses, problems in its asset management unit and the reduction of its work force by nearly a third since Mr. Ackermann took over.
On Thursday, the company announced a fresh round of job cuts, affecting 3,280 people, or 5 percent of the remaining work force. In December, it said that it was cutting 1,920 jobs in its German staff. Together, the reductions will save the bank more than $1.4 billion a year.
Deutsche Bank's fourth-quarter earnings were affected by 574 million euros ($746 million) in costs to cover the job cuts. Excluding the special charge, net income declined 38 percent, to 269 million euros ($349 million), on revenue of 5.3 billion euros ($6.9 billion). Net income for the full year, though, was 2.5 billion euros ($3.25 billion), an 87 percent jump from 2003.
In trading here on Thursday, shares of Deutsche Bank rose 1.3 percent as analysts said the cost savings had exceeded expectations.
Mr. Ackermann did not rule out the possibility of an acquisition. But he said that the most obvious deal - a merger with another German bank - was not attractive because Deutsche Bank would have to pay a premium and absorb the costs of integrating two German work forces.
Still, he said that his bank was putting a renewed focus on the German market, mentioning Jürgen Fitschen, a rising star who was named last fall to take charge of the German franchise.
The most immediate challenge facing Mr. Ackermann is Deutsche Bank's huge asset management division, which has been stung by an outflow of funds, especially in Britain, where it has had to contend with management instability. Investors withdrew 20 billion euros ($26 billion) in assets from the entire division in the fourth quarter.
Reluctant as he was to talk about deals, Mr. Ackermann made an exception in the case of the troubled British unit. "You try and fix it," he said. "If you can't fix it, you sell it."
