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Why Deutsche Bank is not Goldman Sachs, by Morgan Stanley

Goldman Sachs vs. Morgan Stanley

Less identical than they look

Deutsche Bank is becoming Goldman Sachs. It’s dumping its retail arm (Postbank), and staying with its investment bank and fixed income business. Pretty soon, Deutsche and Goldman will be indistinguishable.

Or will they?

According to analysts at Morgan Stanley, they will not. Having scrutinized Deutsche carefully, Morgan Stanley’s analysts say there are some big discrepancies between the two firms. If you’re of the opinion that DB and GS are about to become one and the same, this is what you need to know to set yourself right.

1. Goldman Sachs is a growth machine. Deutsche Bank is not 

Since 2010, Morgan Stanley points out that Goldman Sachs has grown its book value by 10%. Deutsche Bank, on the other hand, has grown its book value by 1%. Morgan Stanley thinks this growth discrepancy will persist.

2. Goldman Sachs is able to operate with wafer thin leverage. Deutsche Bank is not 

Morgan Stanley concedes that there are similarities between Deutsche and Goldman Sachs. Minus its retail arm, Deutsche would derive around 30% of its revenues from FICC and DCM – like Goldman Sachs. Excluding litigation, both banks also made an 11% return on equity in their investment banks last year.

There the similarities end. Morgan Stanley’s analysts estimate that Deutsche needs, ‘twice the balance sheet (leverage exposure) of GS to extract the same unit of profit.’ As Deutsche delevers, this could become a big problem for the German bank.

3. Deutsche’s non-core business is a big problem. Goldman doesn’t have one 

Morgan Stanley’s analysts are concerned about Deutsche Bank’s non-core unit.

Risk Weighted Assets in Deutsche’s non-core unit are high and rising – at the end of 2014, they were equivalent to 151% of Deutsche’s core assets, up from 94% the previous year. Worse, Morgan Stanley’s analysts think Deutsche’s non-core assets are very credit-focused, and therefore highly susceptible to default. “Put another way, the credit intensity is 3x that at Commerzbank, where investors at our recent conference were cautious about potential loss experience,” they say. Goldman Sachs does not have these issues.

4. Deutsche also ranks behind Goldman on capitalization and return on equity 

Deutsche is better than Goldman for dividend yield. But it’s worse than Goldman for almost everything else.

Deutsche and Goldman

5. Deutsche has some big litigation issues. Goldman does not 

Between now and 2017, Morgan Stanley thinks Deutsche’s total litigation bill will be €4.5bn – 2x higher than at Goldman Sachs. There’s a possibility that Deutsche hasn’t set enough money aside to cover this bill. Goldman doesn’t have this issue either.

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