Carefully read “Deutsche Bank and the Road to Basel III” and develop your answers to the two questions listed below:
1. How has the orientation of Deutsche Bank changed over time in terms of business segments nd global nature? Why? Do you agree with its strategy? Explain.
2. What do the historical financials tell us about Deutsche Bank’s profitability ratios in terms of ROA and ROE? What is the financial outlook for Deutsche Bank in view of Basel III and the euro zone debt crisis?
Background and History of Deutsche Bank
There has been the revamping of business operations for Deutsche Bank for many different times especially when any identified economic downturn as occurred. However, it is evident that the bank has been trying to revive its normal operations from the downturn in economic terms in order to normalize their profit margin. While different banks from America and Europe have been struggling to show their strong positions to their shareholders, Deutsche Bank currently announced that there is a need of implementing marginal cuts to equity business of trading. The bank has showed to be so effective at coping with the changing industry. In 2012 when the bank was in struggle to be in line with the new standards of Basel III, there was belief that the bank would manage to attain its position undoubtedly (Strasburg, 2019). Deutsche Bank was established in 1870 in Germany with its main objective of “Circumventing the superiority of banks in Britain that were concentrated in global foreign trade. Throughout the great depression and world wars, Deutsche suffered a lot more than other international companies because it was so much tied to Germany. After World War II, the bank even had to break up temporarily. However, Deutsche regained its growth in the late 1950s making it a successful bank in that by 2012, it was among the most relevant banks (Storbeck, 2020). This achievement in financial results rose because the former CEO of the bank Joseph Ackermann dropped out and left its co-CEOs Anshu Jain and Jurgen Fitschen communicated to shareholders and investment analysts on the quarterly of the bank.
Initially, the main focus of Deutsche bank was traditional retail banking. However, the bank had to extend and establish its financial service centers in about twelve countries within the region of Asian-Pacific and other countries like Netherlands, Brazil, and Canada so that the bank would reach international level (Deutsche Bank and the Road to Basel III”, 2013). From that moment, Deutsche bank has developed tremendously through diversification and expansion placing it among top global banks. From the time Deutsche bank was established, it has been much effective in transformation according to change and making its business decisions and profitable investments systematically. From the beginning, the bank started with having a goal of becoming the first German bank to operate in foreign countries and changing the established British banks leadership (Storbeck, 2020). At a very fast rate, Deutsche became dominant in Germany carrying out acquisition of small banks that failed to pass through the financial crisis of 1870s. This made the bank to be superior in Germany taking the first position in trading government securities
Diversification and Expansion
In 1990s, Deutsche bank on the capital market of German issued its ever first foreign currency bond within 44 years this exposed it to international markets. During this period, changes in politics in Eastern Europe assisted Deutsche bank to set up several subsidiaries globally and in 2001, the bank had established its branches in seventy countries and it was registered with NYSE. Furthermore, after Deutsche had regained into becoming a global bank, the business focus also shifted from traditional retail banking to global investment banking (Buch & Dages, 2018). Towards the end of 2002, much of Deutsche Bank revenues arose from activities on investment banking until 2007. Trading and Sales revenues increased from 30 percent in 2002 to 42 percent in 2007 total revenues. On the other hand, the retail banking and traditional commercial revenues declined from 22 percent in 2007 to 19 percent in 2011. Positive variations in the revenue compositions for Deutsche bank were observed. During 2011, over 100,655 employees were registered in Deutsche bank in over 72 countries with about 3,065 branches all over the world of which 2,035 were established in Germany. In 10 years from 2002 to 2012, Deutsche bank increased the amount of assets meant to be for activities on investment banking (University of Virginia. 2013). These assets rose from EUR 640 billion to EUR 1,860 billion. This shows a huge difference towards the development of the bank.
Recently, Deutsche bank decided to “scale back” its business of trading leading to a reduction in the bank’s revenues from $20 billion in 2010 to $8.5 billion in 2018 (University of Virginia. 2013). The trading system of Deutsche currently contributed less total revenue of only 30% than the 53% it contributed a decade ago. This decline affected the bank although its operations are seen increasing steadily (Hao, & Yan, 2012). Furthermore, the plan of reorganization within the Deutsche bank has incurred huge costs. These costs arise from the recent legal issues in the bank which reduced its division margins from 29% in 2014 to 4% in 2018 (Blundell-Wignall, & Atkinson, 2010).
I strongly agree with Deutsche Bank’s strategy which is currently gaining traction through stabilizing revenues and stimulating the performance of their banks worldwide as stated by Christian Sewing (University of Virginia. 2013). This strategy has greatly led to the development of the bank making it to be among the top strongest banks in the world. Deutsche bank has always kept its strategic plan of becoming the top investment bank in Germany and extending its services to several countries worldwide (Hao, & Yan, 2012). It has managed to accomplish this target time after time through its existence in the banking sector for over a century. It period has not been achieved by very many banks and therefore I believe the strategy of Deutsche Bank is very important in its performance and investment services.
Transformation of Business Operations and Profitability
In conclusion, the decisions of Deutsche Bank to alter or revamp its trading behaviors in the banking business resulted into the decline into its revenue in 2010 from $20 to $8.5 compared to 2018. Therefore, when revamping and imposing some new orientations to the business, employees tend to take a lot of time to catch with new measures of operation. In general, Deutsche Bank always get some setbacks especially when the new decisions or approaches are implemented. However, the decision that is well assessed and evaluated leads into the increment of profit margin for the company. Change of orientation of Deutsche Bank over time in terms of business segments and global nature has not been easy since it involved a lot of costs and at the end, improvement in financial status and entire performance of Deutsche bank has increased.
Return on Assets (ROE) is defined as an indicator of the profitability of a company relates to its total assets. This is calculated by dividing the operating earnings of the company over its total costs. Deutsche Bank’s ROA has been decreasing rate for the previous ten years. In addition, Return on Equity (ROE) is defined as the total net income returned expressed as a percentage of shareholders’ equity. ROE measures the profitability of the bank through providing results on how much profit the bank creates using the investments of its shareholders. Deutsche bank’s ROE is seen increasing steadily since the end of the 2008 financial crisis. Recently, Deutsche Bank resorted to Basel III from Basel II.
Historical financials about Deutsche Bank’s profitability ratios in terms of ROA and ROE
The Deutsche Bank historical financials indicated that the financial years from 2002 to 2007, there is an increasing reliance ROE of profitable share earnings of the bank. There is also comparison between ROA and ROE within Deutsche bank (Blundell-Wignall, & Atkinson, 2010). In comparison, the ROE Deutsche bank of higher than that of other banks that existed in that period. The trends show that ROE of Deutsche bank rapidly increased from year to year which proves to the investors that they are free to invest in this bank (Wilson, 2016). However, the ROA had a lower increasing rate whereby in some years a decrease in RAO was observed. Basing on the financial data retrieved from Deutsche bank, the bank basically earns and gains most of its profits through increasing ROE leaving ROA constant. This implies that there is an increase in leverage will lead to an increase in risks too. The reason is because the bank borrows money instead of using the capital asset from its own savings. However, the ROA is also applied in measuring the profitability of Deutsche bank (Wilson, 2016). Nevertheless, it is not encouraged for Deutsche bank to increase either ROE or ROA but rather it is important to use both of them to know how its profitability ratio. In this case therefore, Deutsche bank has to gain more capital assets or total assets so as to decrease its leverage risks.
Revamp of Trading Behaviors and Strategies
The financial outlook for Deutsche Bank in view of Basel III and the euro zone debt crisis
Due to the background of euro zone debt crisis, Basel III rose and replaced Base II. During the period of euro zone debt, the profits of Deutsche bank declined gradually. However, Basel III promoted equity capital requirement. However, it is known that Deutsche currently finds it difficult since the leverage is very high (Blundell-Wignall, & Roulet, 2012). Although the new regulation has helped to control and reduce the risks, Deutsche bank will also experience a reduction in revenue. The reduction in leverage is done through increasing capital equity or seeking money from investors (Blundell-Wignall, & Roulet, 2012). However, both these methods tend to have higher risks while applying them since it is widely known that seeking money directly from investors is never simple. Therefore recently, Deutsche bank raised its capital by combining with Germany post bank and laid off some workers through termination. It is evident that Deutsche bank brought various concerns especially towards 2011 when it got a pro-forma core Tier 1 Basel III capital rate of 6.7%. (Trefis, 2013). Most important to note is that Deutsche bank has struggled to go through various financial conditions which include the Great Depression and World Wars. Such setbacks have made Deutsche Bank to remain strong and maintain its positive trend of operation over years as a powerful bank around the globe (Jenkins & Schäfer, 2013). Furthermore, Deutsche Bank has always been effective towards the variation with time and crises, thus attaining investments that are profitable as well as easing decision making. As its core target, Deutsche Bank right from its start has been aiming at extending its services on the international level as well as colliding with British bank leadership (Vestergaard & Retana, 2013).
Since the initial focus of Deutsche Bank was basically traditional retail banking, the bank extended to 12 countries across Asia-Pacific region to achieve its target. However, the financial outlook of Deutsche bank has been increasing positively. Currently the bank has undergone diversification and expansion to reach the top where it is now. In addition, the historical financials about Deutsche Bank’s profitability ratios in terms of ROA and ROE indicate that the ROE of Deutsche bank are higher than that of other banks that existed in that period but the ROA are rather low. Furthermore, during the period of euro zone debt, the profits of Deutsche bank declined gradually. This shows that Deutsche bank has tried to maintain its financial status in banking and investment.
Blundell-Wignall, A., & Atkinson, P. 2010. Thinking Beyond Basel III: Necessary solutions for capital and liquidity. OECD Journal: (1), pp5-6.
Blundell-Wignall, A., & Roulet, C. 2012. Business Models of Banks, Leverage and the Distance-to-Default. Journal of Financial Market Trends, ,Volume 2, pp21-34
Buch, C. & Dages, G.B. 2018. Structural changes in banking after the crisis, vol. 1, pp.51-56. Retrieved from: https://www.bis.org/publ/cgfs60.pdf
Hao, Q and Yan, X. 2012. The Performance of Investment Bank-Affiliated Mutual Funds: Conflicts of Interest or Informational Advantage? The Journal of Financial and Quantitative AnalysisVol. 47, No. 3, pp. 537-565
Jenkins, P. & Schäfer, D. 2013. Europe’s banks turn to capital raising to meet Basel III. Retrieved from: https://www.ft.com/content/4b1e76ce-bbb1-11e2-a4b4-00144feab7de
Strasburg, J. 2019. Deutsche Bank Cites Progress in Turnaround. Retrieved from: https://www.wsj.com/articles/deutsche-bank-cites-progress-in-turnaround-11575969783
Storbeck, O. 2020. Deutsche Bank aims to become profitable this year. Retrieved from: https://www.ft.com/content/f05a155c-4328-11ea-a43a-c4b328d9061c
Trefis, 2013.Understanding Deutsche Bank's Challenges With Basel III Compliance. Retrieved from: https://seekingalpha.com/article/1479721-understanding-deutsche-banks-challenges-with-basel-iii-compliance
University of Virginia. 2013. Deutsche Bank And The Road To Basel III. Published by Darden business publishing
Vestergaard, J. & Retana, M. 2013. Behind Smoke And Mirrors On The Alleged Recapitalization Of Europe’s Banks. Retrieved from: https://pure.diis.dk/ws/files/62446/RP2013_10_Smoke_and_mirrors_web.jpg.pdf
Wilson, A. 2016. What Do the Historical Financials Tell Us About Deutsche Bank’s Profitability Ratios in Terms of Roa/roe? Retrieved from: https://www.allfreepapers.com/Business/What-Do-the-Historical-Financials-Tell-Us-About/100322.html
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