Académique Documents
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Section A
Group 3
Sushmita Patel (056) I Aditi Pandey (066) I Monika Shruti Gupta (096) I Mrinal Sharma (098) I Pranav Bharti (106) I P. JayaBharath I (284)
Banking Industry: Globalization
Advent of internet Investors/corporations Banks had to With economy of scale, Banks moved to be
led to easier global from developed provide full range investment banking one-stop shop
communication & economies started of commercial and activities (sales, trading, leading to debate
transactions pouring funds into investment asset management) on their role in
emerging economies banking services became more profitable society
Banking Industry: Competition
Competitor banks Globalization and Competitors achieved To finance asset Competitors had
also started frenzied stock market most of global growth, lesser leverage
internationalization increased volume of revenue gain through competitors used leading to lesser
financial transactions investment banking past profits, new differential between
worldwide activities leading to equity capital and ROA and ROE than
more rivalry new debt capital Deutsche Bank
Deutsche Bank’s History
• Deutsche bank was founded in Germany. • Germany started recovering in 1958 when Deutsche
• The objective was to promote trade relations between Bank issued its first foreign –currency bond in 44 years,
Germany and rest of the world. thereby reopening the market to international firms.
• It was established as a universal bank providing both • It acquired major banks in Italy, Spain, UK and USA.
investment banking and commercial banking. • In another thirty years, they had expanded into
• After the World War II German economy inflation rates Canada, Brazil, Portugal, and Netherlands.
were higher. • By 2001 it was operating in 70 countries and was even
• Deutsche Bank lost most of its foreign assets and listed on the NYSE.
borrowers failed to pay back debts. • Deutsche Bank increased their focus on investment
• During the depression the Germans invaded countries banking activities and commercial banking took a back
and by the end of World War II Deutsche bank had seat.
transferred money and holdings from Jews to the • The goal was to make it a “one-stop shop”.
German Government. • Around 62% of total revenue was contributed by
• Post World War II Deutsche bank was split into ten Investment banking activities in 2007 hence the bank
different banks, however 10 years later 4 parts of was focused on increasing its asset base dedicated to
Deutsche Bank were merged and allowed to operate investment banking activities.
under the name of Deutsche Bank.
Deutsche Bank’s Financials
• Around 1990s, with commercial banks already focused on • Also, most investment banking activities, especially
providing investment banking activities & being a one- sales and trading and asset management benefited
stop shop for financial service needs, the world economy from economies of scale, meaning they became more
experienced globalization profitable as they grew in size
• Proliferation of internet being one reason which made • To gain new customers and maintain existing ones,
global communication & cross-border transactions easier Deutsche bank needed to provide services on a global
to facilitate. level and secure its position in the investment banking
• Moreover, many corporations & investors in developed market
economies were pouring funds into emerging markets in
response to staggering projections for GDP growth
• For banks, globalization meant they had to provide a full
range of commercial & investment banking services to
clients, & they had to do so in all the places their
customers were doing business
• Increasingly, their customers were conducting business
outside their home countries
Global Competition
• Several competitors followed suit, as DB set its path on • To finance the asset growth, banks had three primary
internationalization options: use profits earned in previous periods, issue
• This attributes to the effects of globalization and a new equity capital thereby diluting existing
frenzied stock market from 2002 through 2007, which shareholders or borrow debt capital thereby increasing
saw an increase in the volume of financial transactions leverage
worldwide • In contrast, one of DB’s major competitors, JPMC had a
• Even the banks that had little history of activity in capital greater ROA over the same time period- more than
markets vied for a piece of action such as Barclays, and twice that of DB in 2006
BNP Paribhas (these had small domestic markets) • To achieve a higher ROE without a significant increase
• Most of the gains DB’s competitors achieved in global in ROA, DB employed massive leverage, increasing its
revenues were the result of increased investments in leverage ratio, which resulted in significant gains in
investment banking activities. As a result rivalry both ROE & EPS for a while
intensified within the international investment banking
market
• Impressive growth in earnings masked the fact that
Deutsche bank’s increased profits failed to come from
productive assets, they came from increased leverage
Basel I, Basel II and Basel III
• To improve the regulatory framework for banks, Basel III was introduced in 2009 as per which the banks
were required to increase minimum Tier 1 equity capital from 4% of risk weighted assets to 9.5% to 13.5% of
risk weighted assets.
• Also the risk weights assigned to certain classes of assets were required to be increased as per Basel III.
• The banks have to gradually start abiding by Basel III norms from 2013 and have to comply with it
mandatorily by 2019.
• Deutsche Bank had a core Tier I ratio of 10.2% and a total Tier I ratio of 13.6% by July 31, 2012 based on
Basel II rules.
• While it could meet the requirement according to Basel III rules in the beginning of 2013 (Tier I ratio of
7.2%), it was far from the 9.5% core Tier I ratio that it had to meet by 2019.
• Deutsche bank took the route of inorganic expansion in European retail bank business by acquiring a 50.2%
stake in German-based Postbank
• Meanwhile, Deutsche Bank consolidated its position by having the largest market share in U.S. fixed income
trading by July, 2012.
Valuation
Analysts Projection
2012-2013 Predicted share value = EUR 4.00 Against Revenue of EUR 32.8bn
2013-2014 Predicted share value = EUR 4.92 Against Revenue of EUR 34bn
Both years showing sharp increase from trailing 12month value of EUR3.04/share
Concerns
• Doubt on Deutsche Bank’s ability to meet new regulatory framework as per Basel lll norms
• Phase-wise implementation starting from 2013 till 2019
• Need to increase regulatory capital to comply with increased ratios and to offset additional capital
required with new risk weights assigned to certain assets
• In an attempt to raise new equity, capital value of existing shares will get diluted
• There will be reduction in profitability and increase in insecurity in Europe due to debts.
• Deutsche Bank’s increased profits came from increased leverage and not from productive assets; in
2011 DB’s ROA was just 0.2% while ROE was 9.02%
Analysis
Conclusion
• To finance asset growth on balance sheet" banks primarily use one of the following methods.
• Use profits used in the previous years.
• Issue new equity capital thereby diluting the equity value of the existing shareholders
• Borrow debt capital thereby increasing leverage (In 2012 Deutsche bank had risk weighted assets around
EUR488 billion and core tier 1 ratio of 7.2%).
• To comply with Basel III norms Deutsche Bank can go ahead by issuing hybrid securities like convertible bonds
or warrants and reducing the asset base in order to maintain a balance between ROE and ROA and provide a
realistic picture to its investors and customers.