Deutsche Bank AG's strategic shift to retail banking may not produce the revenue growth it hopes for because it relies heavily on Germany, a fragmented and highly competitive market where Deutsche has so far not been able to establish a strong retail franchise, analysts warn.
The lynchpin in the group's overall turnaround plan is a new subsidiary, created by the merger of Deutsche Postbank AG and Deutsche Bank's private and commercial banking operations. The merger, completed May 25, created the largest player in the domestic retail banking market with over 20 million retail clients, a further 1 million commercial and corporate clients, and €331 billion in AUM.
"Now [...] we are focused on executing our plan to generate around three-quarters of the targeted €900 million of cost and revenue synergies by 2021 with the goal of reaching the full run rate the following year," CFO James von Moltke said June 6. "We have the scale that we need to succeed."
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Analysts, however, see potential risks as Deutsche would have to cater to a diverse group of customers and has chosen a strategy which has been ineffective in the past.
Brand mismatch
Postbank has been at the center of Deutsche Bank's attempts to expand its presence in the retail banking space at home since 2008. It took Deutsche from 2008 to 2015 to complete the acquisition and integration of Postbank but it was not able to mesh its private banking brand with Postbank's client base.
The group attempted to split off consumer banking services, which were considered less attractive, under the Postbank brand while high-end private customers were kept under the Deutsche Bank brand, analysts at management consultancy Moonroc Advisory Partners said in their annual report on German retail banking 2018. This two-tier model was not successful because none of the customers would accept being classified in the lower tier.
In the early 2000s, the group created Deutsche Bank 24 to serve the mass market, while the Deutsche Bank brand was to serve high-net-worth clients. Deutsche expected Bank 24's operating profit to grow to €1 billion in 2004 from €400 million in 2000 but the project was terminated after only three years.
"They actually threw the low-margin [customers] out of their own brand and this is a pretty bad thing to do," said Heino Ruland, a strategist at Ruland Research in Germany. The bank's retail market share in Germany was notably affected because many of the customers who were moved to the Deutsche Bank 24 brand opted for the competition, Ruland said. "It was the first major mistake [Deutsche Bank made] in order to keep high-net-worth individuals under their own brand."
Now Deutsche Bank plans to again run the Postbank brand separately, under the motto "two brands, one bank", and clearly divide the services provided by those brands. "Deutsche Bank sees itself ... as a partner and risk manager providing comprehensive advisory services to its clients, Postbank will cover "standardized, day-to-day banking needs," the group said May 28 when it announced the completion of the merger.
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The right strategic positioning of Postbank in the market will determine Deutsche's success or failure, Moonroc said. It is important the group leaves Postbank enough scope to continue to operate independently as secondary brands have not fared very well under the Deutsche Bank umbrella. The Norisbank brand, which Deutsche acquired in 2006, is barely known in Germany and the Berliner Bank brand, another retail bank acquisition in Germany, disappeared in 2016, the analysts noted.
Postbank had over 13 million customer accounts on Sept. 30, 2017, accounting for over half of the new subsidiary's combined customer base.
Challenging home market
Deutsche faces fierce competition in the German market, which is among the most fragmented in Europe. Privately owned lenders operate in just a fraction of the domestic market, with state-owned savings banks and cooperative banks dominating both retail and corporate lending. Furthermore, Germany's second-largest lender Commerzbank AG has also focused its multiyear revamp on domestic expansion in retail and SME lending, aiming to boost revenues through a rapid acquisition of new clients. Foreign-owned competitors such as ING-DiBa AG and TARGOBANK AG & Co. KGaA and fintech companies chip away further parts of the market as all compete for the same client pool.
"Deutsche Bank has lost its influence in the home market to competitors such as the savings banks, Commerzbank," Ruland said. Deutsche must stabilize its market share in Germany before looking to markets abroad, he said.
The bank will focus on Germany, Italy, and Spain, and will pull out of Poland and Portugal.
After pursuing a global expansion in investment banking over two decades, the bank announcing in April it will scale back its investment bank and focus on "less volatile" revenue streams to return to profitability. Cost reduction plays a key role in the group's revamp plan with CEO Christian Sewing vowing a "non-negotiable" target of adjusted operating expenses below €23 billion in 2018.
However, simply cutting costs will not be enough for a successful retail bank, Moonroc analysts said. It needs a "credible growth story", one which customers can get on board with, and the key for that is Postbank's position within the group and on the market.
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