Anshu Jain, head of Deutsche Bank AG's investment banking division, earned a promotion to co-chief executive of Germany's biggest bank last month by cementing its status as a debt trading powerhouse.
He's had less success in a seven-year effort to turn the equities unit, which sells and trades stocks and equity-linked derivatives, into a global leader, a performance that may haunt the Frankfurt company as higher capital requirements threaten to make fixed-income businesses less profitable.
"Jain's track record is pretty good in terms of bringing businesses he's managing to a top-three position, though he hasn't done that with equities so far," said Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein Ltd. in London. "The market will clearly shift away from the relative importance of fixed income compared with underwriting, advisory and equities. It's clear that Deutsche Bank has to move over to these businesses."
Deutsche Bank fell to seventh in equities in the first half of this year from fourth in 2004, based on its share of revenue generated among the nine biggest investment banks, according to data compiled by Bloomberg News from company reports. That compares with a second-place ranking in overall sales and trading revenue, which also includes fixed income, currencies and commodities, up from third in 2004.
The decline occurred as Jain overhauled his equities strategy and management after losses during the credit crunch in 2008, changing his focus from bets with the bank's own money to trading for customers, a shift mirrored by rivals amid a regulatory crackdown on proprietary trading.
Jain, 48, oversees more than 60% of Deutsche Bank's revenue and 80% of its pretax earnings as head of the corporate and investment bank. The unit is made up of trading, underwriting, corporate finance, mergers advice and transaction banking, which includes cash management.
Jain will share the CEO role with Juergen Fitschen, 62, who is responsible for Germany, after Josef Ackermann, 63, steps down on May 31. Jain declined to comment for this story.
"If you look at Jain's performance throughout the financial crisis and earnings over the years, he played a massive role in where Deutsche Bank stands today," said Michael Rohr, an analyst at Sylvia Quandt Research GmbH in Frankfurt. "It would be desirable for Deutsche Bank to build its strength in equities, but not if that requires exaggerated costs."
Higher earnings from equities would help the bank counter the effect of stricter capital requirements agreed to by the Basel Committee on Banking Supervision that may cut returns from fixed-income businesses. The profitability of a trading unit often rises with market share, so climbing in the equities rankings may help Jain sustain returns for shareholders. "Typically at 10 you lose money, at seven you just about cover your cost of capital," Jain told investors in London on June 1, speaking of industry rankings. "You start to return to shareholders at five; at three, you become hugely profitable."
"That pressure to be top three will be the difference between an acceptable ROE and the one that isn't," particularly under Basel III rules, he said, referring to return on equity.
While Deutsche Bank has gained market share in U.S. and Asian cash equities, the bank remains "underweight" in these areas, along with equity derivatives trading, Jain said in June, citing data from market research firms.
The U.S. cash equities business, or carrying out stock transactions on behalf of corporate and institutional clients, is the hardest to crack. The German bank aims to reach the top five, and is seventh now, according to Jain's presentation. "The U.S. market is the 800-pound gorilla and represents about 50% of the global commission pool in equities," said John Colon, a consultant at Greenwich Associates, a Stamford, Conn., market research and advisory company for financial services firms. "Whoever leads in the U.S. will look like a global leader."
The Basel committee is changing rules on how much capital banks need to hold for their operations. Regulations on trading assets to be implemented by the end of this year, as well as additional changes that come into effect by 2019, will shave between 13 percentage points and 14 percentage points from pretax return on equity at Deutsche Bank's investment bank, according to slides Jain presented in June.
An additional 3 percentage points to 4 percentage points may disappear because of regulations such as the Volcker rule, which prohibits proprietary trading, the slides showed.
Deutsche Bank plans to counter that by selling some assets, cutting costs and capturing a greater market share to keep pretax ROE above 20%, compared with 28% in 2010, Jain said. Equities and advisory businesses can produce higher returns because they are less capital intensive and will be less affected by Basel rules.
