Living Large at Deutsche Bank

Ackermann expanded the bank’s balance sheet by about 40 percent | “You can be big, but you have to have the capital backing you up”

Aaron Kirchfeld, Elena Logutenkova, and Nicholas Comfort

Josef Ackermann | The retiring CEO is leaving the German bank with a big, high-risk balance sheet 80 percent the size of the German economy


Josef Ackermann navigated Deutsche Bank through the global credit crunch and Europe’s sovereign-debt crisis with smaller losses than many competitors and no direct state aid. The chief executive officer also pushed back against European regulators who sought to limit the size of bank balance sheets. As he prepares to retire at the end of May, Ackermann leaves a bank whose assets are more than 80 percent the size of the entire German economy.

Deutsche Bank recently leapfrogged France’s BNP Paribas to reclaim the title of Europe’s largest bank. Assets at the Frankfurt-based company rose 14 percent, to €2.16 trillion ($2.88 trillion), in 2011, making it the largest publicly traded bank in the region for the first time in five years, according to data compiled by Bloomberg.

Deutsche Bank’s balance sheet has expanded about 40 percent since 2006, and the company is the second-most leveraged and third-least capitalized of Europe’s 10 largest banks, even after Ackermann boosted reserves and trimmed dependence on borrowed money. “Deutsche Bank has been pretty decidedly opposed to reducing its balance sheet,” says Lutz Roehmeyer, who helps manage about $15 billion at Landesbank Berlin Investment. “It’s understandable: The higher your leverage, the higher the returns when times are good.”

In the last three years, the bank has bought German consumer lender Deutsche Postbank, adding about €200 billion in assets, wealth manager Sal. Oppenheim Group, and part of ABN Amro Holding. Deutsche Bank has also expanded its derivative securities holdings. The higher leverage makes the company’s earnings more volatile and dependent on market swings. When debt markets rallied in 2009, the bank posted a return on average equity of 14.6 percent. The following year, as Europe’s sovereign-debt crisis roiled investors, that measure of profitability fell to 5.5 percent. It stood at 8.2 percent last year. Even so, since the start of the year Deutsche Bank’s shares have gained 32 percent as of March 26, compared with a 17 percent increase in the Bloomberg Europe Banks and Financial Services Index.

The bank is able to maintain less capital than its peers and borrow more to enhance returns because clients (and investors) believe the German government would never let it fail, Roehmeyer says. Insuring against default on Deutsche Bank’s debt with credit-default swaps is less expensive than it is for any of the 10 biggest banks except HSBC Holdings, data compiled by Bloomberg show. Fitch Ratings in December cited Germany’s ability and propensity to support the bank as a reason for giving it a “stable outlook.” Ackermann, 64, has criticized proposals to shrink banks or split them up, saying risk isn’t related to size and global banks are important to international trade and economic growth.

With Ackermann’s imminent departure, the challenge of balancing size and capital strength will fall to co-CEOs Anshu Jain, 49, who now runs the corporate and investment bank, and Jürgen Fitschen, 63, head of the bank’s German business. The bank’s gargantuan balance sheet clearly worries some policy makers. Says Ralph Brinkhaus, a member of German Chancellor Angela Merkel’s Christian Democratic Union who sits on the finance committee: “The truth is we haven’t solved the too-big-to-fail challenge in this country.”

The bottom line Deutsche Bank’s balance sheet is equal to more than 80 percent of German GDP. Its stock is up 32 percent since the beginning of the year.


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