Broken Giants Banks Eye Uncertain Future

A forum at Davos revealed that the bosses of the world's major banks have very different ideas on how to tackle the twin threats of falling margins and rising regulation.
Let's go global: Anshu Jain leads discussions on the Davos panel.

Old dreams, it seems, die slowly. Deep in his heart, Anshu Jain, co-CEO of Deutsche Bank, apparently remains convinced of the need for a global universal bank.

“This model has many positive sides, and our customers, particularly from German mid-sized companies, are always telling us that they need a bank that offers all the relevant products internationally,” he said in a round of discussions at the World Economic Forum in Davos this week.

Mr. Jain and the bank's other chief executive, Jürgen Fitschen, have long defended their vision of a globe-spanning banking group. Yet financial institutions that offer everything from private consumer accounts and asset management to investment banking on a global scale are threatening to become an obsolete business model.

The universal banking model is not dead yet, but it is no longer as efficient as before. Richard Lumb, Accenture

“The universal banking model is not dead yet, but it is no longer as efficient as before,” said Richard Lumb, the group chief executive for financial services at management consultants Accenture.

Regulators are primarily to blame for these financial doldrums as they continually demand greater security buffers from financial institutions. They set tough limits on the debt-equity ratio, making much of a bank's business even more expensive, especially investment banking.

Mr. Jain knows universal banks were among the biggest losers in the financial crisis. “No other business model is being targeted by the regulators and is so looked down upon in the stock market,” he said in Davos.

That philosophy has led Deutsche Bank to work on a new strategy.

 

Finance Sector performance return on equity compared with other industries

 

A spin off of the bank's retail arm, Postbank, is a scenario being studied, or, in an extreme case, even the entire private customer business. This would seem to make sense as the sector is under considerable pressure due to continuing low interest rates and rugged competition in the German market.

Additionally, the new German bank-separation law requires financial institutions to hive off their investment banking activities – which must be managed at their own risk – from deposit-taking activities and turn them into independent subsidiaries by July 2016.

But the investment banking arm is also threatened. Cuts may be in the pipeline as a number of investors are slowly but surely losing faith in Deutsche Bank's ability to maintain its global performance in all of its fluctuation-susceptible divisions. According to a major shareholder, the financial institution has not yet profited from the partial withdrawal of rivals such as UBS or Barclays.

It may console Mr. Jain that he isn’t alone in facing these problems. Sitting with him on the podium in Davos was Brian Moynihan, chairman and chief executive of Bank of America, and Douglas Flint, group chairman of Europe’s largest bank, HSBC. Both banks are struggling with similar issues. “We continually have to re-learn to concentrate on what we know best,” Mr. Flint said.

In the past years, much has been discussed about what banks should no longer be doing but little about what they should do. Douglas Flint, Group chairman, HSBC

The extent of the structural changes underway in the banking sector is illustrated in a new study by the international management consulting firm, Oliver Wyman. Shortly before 2000, the average rate of return for major financial institutions was around 20 percent, but by 2013 it was just 7 percent, comparable to returns of companies offering basic services.

Overall, returns from 16 European and eight U.S. banks classified by regulators as relevant on a global scale have plummeted 70 percent since 2006.

Citigroup also faces a decisive year, according to Mike Mayo, a bank analyst with the independent brokerage CLSA. Either the major bank does well in stress tests set by U.S. regulators, he says, or it is high time to “aggressively split up” the financial institution.

Mr. Lumb believes pressure from the regulators may lead to banks “slowly moving more strongly again in the direction of a system like that which existed in the U.S. under the Glass Steagall Act.” This was the strict separation of investment banking from private and company customer business, which was law in the United States until its repeal in 1999.

Still, the large global banks aren’t discouraged. “Our customers need a broad range of services,” Mr. Moynihan said. HSBC’s Mr. Flint took a more combative stance, declaring: “In the past few years, much has been discussed about what banks should no longer be doing but little about what they should do.”

Mr. Jain, meanwhile, revealed the challenges have not made him tired of his job. “I don’t know what job I’d rather be doing,” he said.

 

The author is deputy head of Handelsblatt's financial desk in Frankfurt. To contact the author: [email protected]