Deutsche Bank's big growth area is underperforming rivals'

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Even as Deutsche Bank winds down its capital release unit (CRU) with the sale of $50bn in assets to Goldman Sachs, it's building up elsewhere. This week, it recruited another two private bankers from Credit Suisse, after lifting 13 people from the Swiss bank in July. 

Deutsche has big plans for its wealth management business. At the time of its strategic announcement in July, it boasted plans to grow the business, even while achieving €400m in "cost synergies" by 2020. In November, it appointed Claudio de Sanctis as global head of wealth management (Sanctis was previously head of European wealth management), replacing ex-McKinsey & Co. consultant Fabrizio Campelli, who said in July that the bank planned to hire 300 new relationship managers globally and to go after entrepreneurial clients in Italy, the U.K., Spain, Turkey, Latin America, and the Middle East to supplement its existing client base in Germany. 

Growing the wealth management business makes sense. Wealth management promises a steadier flow of revenues than the trading-focused investment bank and provides a steady source of funding. It's a model that's succeeded for Credit Suisse and that's being espoused by the like of Goldman Sachs. In October, Campelii said he aspired to a 12% return on tangible equity in the private bank by 2022. 

While this may be a worthy aspiration, however, Deutsche's private bank is very far from being there yet. In the third quarter of 2019, the post tax return on average shareholder equity at the bank was only 1.6%. In the first nine months of the year it was -0.9%, down from 4.3% in the same period of 2018. The private bank is moving in the wrong direction. 

Deutsche offered various excuses for this at the time of its third quarter results. - 'Interest rate headwinds were not fully offset by growth in volumes and fee income,' and, profitability fell 'as reorganization measures mainly in Germany were partially offset by higher investments in Wealth Management and higher internal service cost allocations.' 

Somewhat damningly, however, intelligence firm Tricumen says Deutsche's wealth management business also underperformed rivals' in terms of operating revenue growth in every single category this year: revenues at DB grew more slowly than elsewhere in wealth management advisory, lending, investment management and brokerage, says Tricumen. No other bank performed as badly in wealth management across the board. 

This presents a problem for de Sanctis as he attempts to fulfill the unit's strategic promise and to increase the return on equity in the unit. Deutsche's defenders might point to the break-up of Sal Oppenheim in Germany in late 2017 as a drag on growth, but this should surely be in the past by now. 

Deutsche needs to hope it is. It wasn't just wealth management that underperformed in the first nine months of 2019, it was also DCM bond issuance, securitisation and ECM according to Tricumen. Only one area of the bank grew revenues faster than rivals: the transaction bank run by 39-year-old Stefan Hoops. That's a problem as the year draws to an end.

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