Deutsche's capital map of HSBC should be mandatory for every bank.

Deutsche Bank's chart showing where not to work at HSBC

1 September 2016

2 minute read

Deutsche Bank's chart showing where not to work at HSBC

Deutsche Bank has got issues. Goldman Sachs estimates that it needs to raise at least $2.2bn to meet the requirements of EU stress tests, or up to $7.5bn if it wants a 1% "comfort buffer" to appease investor unease. This in turn has the potential to hit Deutsche's return on equity, which stood at just 0.7% in the first half of 2016 and normalizes to just 4% for the whole of the past 15 years.

As Deutsche struggles to simultaneously hike capital and returns, it may want to cast an eye over the nasty chart below, produced by its own banking analysts in reference to HSBC. The red areas of the chart are the businesses where HSBC doesn't cover its cost of capital and has no chance of doing so for the foreseeable future. The green areas are where the cost of capital is already covered. And the yellow areas are where the cost of capital isn't covered, but could be - soon.

As a whole, HSBC holdings does not cover its cost of capital: Deutsche estimates the bank's 2016 return on equity at just 5.3%. This is because some businesses (in red), are loss making or generate a miserable RoE in the low single digits.

With the exception of Hang Seng Bank China, the best place to work for HSBC is clearly Asia. In Europe, it's clearly HSBC invoice finance or HSBC asset finance which generate phenomenal returns of 61% and 75% respectively. The US is pretty much a write-off.

Deutsche's analysts don't break out HSBC Global Banking and Markets specifically, but they do note that the poor returns in the US business are because the balance sheet there is "consumed" by GB&M, which doesn't sound good for anyone working in HSBC's US investment bank.

Most of all, though, Deutsche's capital map of HSBC goes to show the complexity of large global banks, and the tendency for a few very profitable business areas to subsidize a lot of unprofitable ones. It's a map that Deutsche could do with applying to itself (and undoubtedly has, but won't publicizing it) - the result would be illuminating indeed.

Deutsche Capital map