Deutsche Bank Should Scale Back U.S. Business, JPMorgan Says

(Bloomberg) -- Deutsche Bank AG needs to scale back its U.S. operations and focus on serving European companies to unlock capital and improve returns, according to analysts at JPMorgan Chase & Co.

The U.S. business “consumes material balance sheet resources” while suffering from “persistently low profitability,” Kian Abouhossein and Amit Ranjan wrote in a note to clients on Wednesday. The alternative would be to do nothing and hope for a better environment, which would leave the bank at risk of a “confidence issue” should markets go the other way, they said.

It's “time to change strategic direction,” the analysts wrote. The U.S. business is “in need of shrinkage.”

Deutsche Bank is taking a close look at the U.S. operations as part of a fresh review of its trading businesses, Bloomberg News reported last week. Chief Executive Officer John Cryan is examining activities where Europe's largest investment bank is trailing competitors to determine if it should try to win back market share or exit, said people familiar with the review, dubbed Project Colombo.

The Frankfurt lender's U.S. business consumes at least 10 billion euros ($12.3 billion), or about 20 percent, of Deutsche Bank's common equity, the analysts wrote. Shrinking the U.S. equities and corporate clients units would be key to increasing profitability and freeing up capital, they said.

For more on Project Colombo, click here.

Deutsche Bank probably lost market share to big U.S. investment banks in the first three months of the year, marking a fourth consecutive quarterly decline, the analysts wrote. The outlook for revenue “does not look encouraging” and it's not clear how the bank would win back market share, especially in equities, they said.

Cryan last year named former finance chief Marcus Schenck to help oversee the corporate and investment bank, while the CEO himself assumed oversight for the U.S. operations. The bank recently hired a former Goldman Sachs executive, Peter Selman, in a bid to revive the equities business.

The future of the investment bank, the lender's largest unit by revenue, has been a central point of contention in Cryan's restructuring efforts since he took over in mid-2015. Investors' frustration with the lack of growth prompted Chairman Paul Achleitner to search for a successor to the CEO, people familiar said last week. Achleitner himself has come under fire for having failed to forge a recovery after going through three CEOs in six years.

Deutsche Bank on Wednesday proposed former Merrill Lynch chief John Thain to its supervisory board as part of a wider reshuffle of that body. The 62-year-old is among four candidates who would take over from existing board members when their terms end this year. The appointments are subject to approval at Deutsche Bank's annual shareholder meeting next month.

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net.

To contact the editors responsible for this story: Neil Callanan at ncallanan@bloomberg.net, Christian Baumgaertel, Geoffrey Smith

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