Deutsche Bank’s retreat from SA a boon for other banks
Global lender reduces footprint and creates space for competitors
● Deutsche Bank’s partial withdrawal from South Africa and other markets signals a retreat that other banks have already made, such as Barclays, which a few years ago abandoned its African ambitions to focus on its home market.
Deutsche Bank said this week it would wind up its advisory, corporate broking and sponsor services businesses over the next six months. The group said it would retain a presence in South Africa, specifically in debt capital markets, fixed income and treasury products.
The decision to reduce the group’s South African footprint comes as Europe’s largest lender announced last month that its headcount would fall below 90 000 from 97 000.
According to sources, the bank could cut anywhere from a third to slightly more than half its South African workforce. There are 104 full-time employees in the group’s local office.
But Deutsche Bank’s retreat may be a boon for remaining local and international lenders. The bank’s 2017 annual report shows its South African business had income before tax of à42-million (about R666-million). According to disclosures filed in South Africa, the business reported a profit of R29.7-million for the year to end-December 2017 from a profit of R20.3-million in the prior year.
A former senior executive who did not want to be named told Business Times that Deutsche Bank’s South African business had always been profitable. He said the termination of some of its local business units was the result of the pressure the entire group was under to rightsize the business and put “capacity in the right areas”.
“Unfortunately, even if you are a successful and profitable business, as this has always been, and probably one of the highest return on equity businesses that Deutsche would have globally, from a country point of view this broadbrush restructuring impacts all,” he said
Kokkie Kooyman, a portfolio manager at Denker Capital, said Deutsche Bank’s partial withdrawal opened up an opportunity as its market share would be available for other banks. Clients were likely to spread their business among a number of competitors.
“We are going to see a lot of marketing activity in South Africa from competitors trying get the Deutsche slice,” said Kooyman.
From 2003 to 2008 the bull market brought with it a large number of mergers and acquisitions as well as trading activity, resulting in investment banks expanding.
After the global financial crisis, when regulators stepped in to limit risky investments, a crunch spoiled the party.
Kooyman said from 2008 to 2018 the market was witness to global investment banks rightsizing, and Deutsche Bank was the last of those global financial behemoths to do so. He speculated that this was the end of a 10year cycle of global banks contracting, but it was all dependent on the market.
“If we go into a global bear market in equities then guys will cut further. The investment banks are notorious for being very quick to react to both a shrinking market and an accelerating one.”
Another factor limiting European banks is the regulatory framework. The European Central Bank assumed responsibility for the supervision of euro-area banks in 2014. Prior to this banks fell under national supervisors, resulting in varied regulation.
The former Deutsche Bank senior executive said after the financial crisis US banks were faster to rectify the structural issues in the sector while in Europe the process had taken longer.
We are going to see a lot of marketing activity in South Africa from competitors trying to get the Deutsche slice Kokkie Kooyman A portfolio manager at Denker Capital
He said while there was support in the US for one or two banks like JP Morgan or Citi to be truly global he did not see the same support in Europe to create a global European bank. Instead, the focus in Europe was for strong national banks and possibly regional banks.
Tough times also lead to consolidation. Over the past few week a number of major deals have been rumoured, including a merger between Barclays and Standard Chartered. Both banks are on the FTSE 100. There is also speculation that Italy’s UniCredit is exploring a merger with French rival Société Générale.
Michael Huenseler, head of credit portfolio management at Assenagon Asset Management, said because of regulation in the eurozone and the size of European banks it was difficult to compete with global American banks like JP Morgan because they were subject to different regulation.
But Huenseler said Deutsche Bank could not blame regulation for its woes. He said merged banks might be good to compete internationally, but there were downsides, one of them being that the creation of larger banks through mergers and acquisitions resulted in them being too big to fail, which created systemic risk for economies.