As Deutsche Bank goes for growth, JPMorgan predicts its investment bank will shrink

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If you work for Deutsche Bank, 2019 is supposed to be all about growth. In the conference call accompanying DB's fourth quarter results earlier this month, growth was mentioned 48 times. Only cost or costs were uttered more prolifically. 

Deutsche Bank certainly needs to grow. Banking analyst Kian Abouhossein at JPMorgan says Deutsche as a whole needs to achieve revenue growth of 4.5% this year compared to last if it's to achieve its return on target equity (Rote) of 4.5%. In fact, Abouhossein is predicting that Deutsche Bank's 2019 revenues will expand by an anemic 1.7% in 2019. And in the corporate and investment bank (CIB), he's predicting that revenues will fall marginally this year and increase only minutely in 2020 and 2021.

If Abouhossein's right, it's the sales and trading businesses that will let Deutsche down. Although CEO Christian Sewing has proclaimed that Deutsche's "strategic positioning is completed," that Deutsche's fundamental fixed income business is strong, and that "each and every incremental investment," goes into fixed income and transaction banking,  Abouhossein has his doubts. In the last quarter of 2018, he says it was clear that Deutsche continued to lose market share against American banks in both fixed income and equities trading. By the end of 2020, he's predicting that DB's fixed income trading revenues will be down 4% on last year. This year, Abouhossein predicts that DB equities sales and trading revenues will fall by 5%. - Growth looks hard to come by.

Deutsche Bank, meanwhile, is hiring as well as cutting costs. In the presentation accompanying the bank's fourth quarter results, Sewing said Deutsche planned, 'targeted hiring in fixed income and debt origination,' and that the FX franchise would be expanded in line with transaction banking. 

There are signs that Deutsche is making good on its intentions. Headhunters in London say Deutsche has got recruitment mandates out and as we reported earlier this week, the bank has hired a new managing director for its investment grade credit trading business in London.

As Deutsche chases growth, though, its fixed income sales and trading business is also haunted by the prospect of a ratings downgrade. The German bank's debt is currently on negative rating outlook at Moody’s, and is one notch away from junk at S&P. For a bank with a large and capital-hungry credit trading business, the increased cost of capital inherent in a junk rating could make a hard life even harder still for Deutsche's traders. The silver lining, however, is that the spread between Deutsche Bank's debt and that of peers is falling, and that the German bank only paid 20bps more than BNP Paribas on the US$ bond it issued earlier this year. Once upon a time, though, traders would much prefer to have joined Deutsche than BNP.

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