Deutsche Bank’s Operations and Situation in the Competitive Landscape
Regardless of the sovereign debt concerns and economic crisis that continue to face the European Union and the United States, Deutsche Bank has managed to stay at the top, ranking as one of the largest multinational investment institutions. By 2018, the company’s estimated stock was -0.01 earnings per share (“Deutsche Bank,” n.d.). Despite its remarkable performance, the process of maintaining a strong position in the industry has not been entirely smooth for the corporation. Hence, the firm has been forced to change its orientation and business strategy for survival purposes. This report analyzes Deutsche Bank’s operations and situation in the competitive landscape. The final section recommends how the bank should move forward based on the current events in the countries where it operates.
Section A: Introduction and Overview of the Situation
Deutsche Bank was among the financial institutions that were affected by the European sovereign debt crisis. Between 2009 and 2012, many global banks experienced a 25% decrease in revenue, which was approximately USD 73 billion, from fixed income (Allayannis et al., 2013). The bank, which operates on the global platform, recorded lower profits during the financial crisis. In response to these past and other current challenges, the firm has been forced to change its orientation and business strategy. Deutsche Bank had to review its capital base to meet the new Basel III requirements and to remain competitive in the industry.
Section B: Assumptions and Methods
The analysis is based on the assumption that Deutsche Bank has retained similar asset financing methods since 2012. For instance, profits, equity, and leverage have been the main forms of financing in the organization (Allayannis et al., 2013). Additionally, it is assumed that Deutsche Bank’s Tier 1 equity has been constant. By July 31, 2012, the core tier 1 and total tier 1 ratio was 10.2% and 13.6%, respectively (Allayannis et al., 2013). The qualitative analysis examines the company’s operations in the competitive landscape.
Section C: Business Impacts
The company’s strategy of financing has changed over time. During the financial crisis, Deutsche Bank invested highly in leverage to maintain profitability and its strong market position. For instance, bank leverage was high between 2006 and 2008, with a record of 67.3*, 71.3*, and 70.8* the total assets of tier 1 capital (Allayannis et al., 2013). However, since its operations peaked, the organization has significantly de-levered its balance sheet (Allayannis et al., 2013). Such a strategy has enabled the bank to thrive in the competitive landscape involving other big investment banks, such as JPMorgan Chase, which has a lower ROE than Deutsche Bank.
Section D: Description of Sensitivity, Risks, Successes, Failures, Contingencies, and Strategies
Although the company has achieved remarkable revenue growth in the past, its historical financial reports reveal high risks associated with its financing methods and investment products. In 2013, the corporation had a risk-weighted asset of 13.6%, which was evaluated per Basel II rules (Allayannis et al., 2013). Operating at this level of assets may increase the bank’s risk of insolvency because only a few assets would be available to settle its financial obligations. Additionally, the establishment relies heavily on leverage financing, which is described as a “mask” of the actual profits that the firm earns from productive assets (Allayannis et al., 2013). In 2006, the corporation’s return on assets (ROE) was recorded at 26.72%, which was twice lower than that of its main competitor, JPMorgan Chase (Allayannis et al., 2013). The data reveals that the company is at a high risk of incurring financial challenges associated with debt financing.
While Deutsche Bank has made considerable steps to meet Basel III requirements, its financial outlook reveals that it is yet to meet all the set rules. In 2013, the bank had a core tier ratio of 7.2%, which was lower than the proposed rate of 9.5% (Allayannis et al., 2013). The new Basel III tier ratio is aimed at enhancing banks’ equity capital to minimize insolvency in times of financial crisis. Deutsche Bank’s economic perspective shows that the firm may still be significantly affected by the eurozone debt, which has been a source of the financial crisis in the European Union.
Section E: Recommendations
Despite the above steps, Deutsche Bank’s financial outlook reveals significant niches in light of current events in Germany, other parts of Europe, and the broader global markets in which the corporation operates. These regions, especially the European Union, continue to experience a substantial economic crisis, which may affect the bank’s operations. One of the measures the firm should take to move forward in the presence of such adversities is to restructure its financing strategy to minimize market risks. In particular, the bank should accumulate assets to lower the financial burdens associated with leveraging (Adwani, n.d). The practice can easily facilitate higher ROA and ROE in the organization and protect the firm against adverse outcomes of the euro debt zone.
Deutsche Bank has undergone several changes to maintain its strong market position, meet the new Basel III requirements, and remain competitive in the industry. One of the transformations includes increasing the values on the balance sheet. Regardless of adopting such a measure, the bank remains in a financial position that poses concerns, especially in the Eurozone. The firm’s ROA and ROE have been lower than expected. Hence, the bank can protect itself against the ongoing financial crisis in the European Union by accumulating more assets.
Adwani, A. (N.d.). Case Analysis: Deutsche Bank and the road to Basel III. Retrieved from https://www.academia.edu/31884654/Case_Analysis_Deutsche_Bank_and_the_road_to_Basel_III?auto=download
Allayannis, Y., Yemen, G., Wicks, A., & Dougherty, M. (2013). Deutsche Bank and the road to Basel III. Case Study. Retrieved from https://hbr.org/product/deutsche-bank-and-the-road-to-basel-iii/UV6662-PDF-ENG
Deutsche Bank (DB). (N.d.). Business Insider. Retrieved from https://markets.businessinsider.com/stocks/db-stock