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Deutsche Bank AG (NYSE:DB) is a global financial services firm that offers various financial and investment products to individual, corporate, and institutional clients. Deutsche Bank operates in three divisions: Corporate and Investment Bank, which advises corporate and institutional clients on structuring financial transactions and provides debt and equity issuance; Private Clients and Asset Management, which serves retail and institutional clients and high-net-worth individuals; and Corporate Investments, which manages the firm’s investments, including its alternative assets. Deutsche Bank’s other offerings include life insurance and mortgage products and services.

Based in Frankfurt, Germany, Deutsche Bank is somewhat less leveraged to conditions in the U.S. economy than other leading investment banks, a fact which has benefited the firm during the 2007 collapse of the subprime mortgage industry. While other investment banks’ stock prices were down as much as 45% for the year,[1] Deutsche Bank’s declined less than 5%.[2] The firm is not immune to global macroeconomic forces, however, writing down almost $3.2 billion in mortgage-backed securities and structured credit products in the third quarter of 2007. Despite these losses, strong performance in other divisions led to a 30% increase in net income for the first nine months of 2007 over 2006.[3] With global economic conditions, especially in Europe and the U.S., possibly remaining turbulent into 2008, the challenge for Deutsche Bank will be to continue growing its stronger, less volatile divisions while limiting exposure to further contractions in the debt market.

Business Overview

Founded in 1870, Deutsche Bank AG was established as an international financial services firm aimed at promoting trading between Germany and other markets throughout Europe and the world. Since then, Deutsche Bank has grown into a leading financial services firm, offering a wide range of financial and related products and services. With nearly 78,000 employees and $2.67 trillion in assets as of September 30, 2007, Deutsche Bank is now one of the largest financial institutions in the world.[4]

The firm operates in three divisions:

  • Corporate and Investment Bank (CIB) advises institutional clients on how to structure and execute transactions like mergers and acquisitions. CIB also handles the origination, sale, and trading of equities, debt, and other types of securities. This division is Deutsche Bank’s largest, accounting for 61% of total pretax income for the first nine months of 2007.[5]
  • Private Clients and Asset Management (PCAM) provides investment advisory and management services to both institutional and retail investors. Deutsche Bank’s private banking division, which serves high-net-worth individuals and families as well as certain small businesses, also operates within the PCAM segment. In total, PCAM contributed 22.4%, or $2.3 billion, to the firm’s total pretax income for the first nine months of 2007.
  • Corporate Investments (CI) manages Deutsche Bank’s own investments, including alternative assets like private equity and real estate investments; CI also includes a portfolio of industrial holdings, but these are being eliminated. This segment’s performance depends on changes in the values of its holdings, making it more variable and uncontrollable than Deutsche Bank’s other divisions. CI accounted for 17%, 5.5%, and 16% of Deutsche Bank’s pretax income in 2005, 2006, and the first nine months of 2007, respectively.
Income Statement, in millions USD 2003 2004 2005 2006 9M2007
Net Revenue26,79129,67230,36337,39833,373
Interest Income34,74637,93849,39172,87073,888
Interest Expense27,38130,92242,28463,73964,231
Net Interest Income7,3657,0157,1069,1318,761
Loan Loss Provision1,402504443436403
Non-Interest Income19,42622,65723,25728,26724,612
Non-Interest Expense21,91823,71522,68226,17422,566
Provision for Income Taxes1,9422,1083,0592,8842,521
Net Income1,7193,3474,1797,9007,883
Note: Figures obtained from Reuters and converted using the historical exchange rate (euro to USD) for the last day of the given period.[6][7]

Trends and Forces

Credit crunch could lead to more losses

The contracting global debt market, driven by the collapse of the U.S. subprime mortgage industry, could depress Deutsche Bank’s earnings. By the end of 2007, the market for debt, especially in the form of mortgage- and asset-backed securities, contracted substantially, pushing the value of debt down. The size and significance of the U.S. economy led to the spreading of this contraction throughout many global markets; even though Deutsche Bank has large non-U.S. operations, economic turbulence in the U.S. can still affect both its U.S. businesses and the availability of capital worldwide. By the end of the third quarter of 2007, Deutsche Bank was forced to write-down over $3 billion worth of its holdings, taking a significant bite out of earnings. If the number of mortgage defaults continues to rise, Deutsche Bank and other financial firms could see further losses on their balance sheets. On the other hand, a falling default rate could help stabilize the debt markets and stem losses.

European rate cuts possible in 2008

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U.S. interest rates over time

In response to the spreading credit crunch throughout Europe, some economists have speculated about possible rate cuts from the European Central Bank (ECB) in 2008. The U.K. cut its main rate by a quarter of a percent to 5.5% on December 6, 2007, six days before the third rate cut by the U.S. Federal Reserve.[8] The ECB did not lower interest rates in 2007 response to the credit crunch, keeping its primary rate at 4%. Any European rate cuts would make it cheaper for people to borrow money, which would benefit Deutsche Bank by increasing demand for loans and stimulating business activities like mergers and acquisitions, as well as by potentially decreasing the number of defaults on existing adjustable-rate loans.

Declining global M&A activity

When economic conditions take a turn for the worse, fewer firms look to buy and sell other companies, leading to lower revenues for Deutsche Bank and other investment banks that structure these types of transactions. In 2007, the second half of the year saw a marked drop in both the number and value of completed mergers and acquisitions. This was largely due to the economic uncertainty and contraction in the debt markets started by the subprime lending bust. The spreading effects of the credit crunch and the slowdown in the U.S. housing market could drive down the frequency of mergers and acquisitions worldwide. Deutsche Bank would be especially hard hit by a global slowdown in M&A activity since its Corporate and Investment Bank division accounts for well over half of the firm’s pretax income.[9]

Strong euro hurting income

With the relative strength of the euro, Deutsche Bank’s earnings from other countries and regions translate to fewer euros upon conversion. For example, $1 million USD earned in January 2007 would have converted to €769,334, whereas the same amount in December 2007 yielded only €687,273, a drop of over 10%.[10] The continued strength of the euro relative to other countries’ currencies would result in lower revenues and earnings for Deutsche Bank.


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Global M&A market share (9M2007)[11]

As a diversified financial services firm, Deutsche Bank’s operations span both investment banking and retail banking. Since over half of its profits come from investment banking, however, it’s most often compared to other I-banks such as Goldman Sachs Group (GS), Morgan Stanley (MS), and Merrill Lynch (MER). As Deutsche Bank pares down its retail operations to focus on higher-margin investment banking segments, this comparison will continue to become more appropriate.

One of the main ways in which I-banks are measured is the number and value of mergers and acquisitions that they complete; the fees from these transactions are usually very significant to a firm's bottom line. In the first nine months of 2007, Deutsche Bank came in 9th in terms of the value of its M&A deals completed, advising clients on 188 deals valued at a total of $661 billion.[12] This equates to around 17% of the $3.87 trillion of M&A in the first nine months of 2007, considerably less than competitor Goldman Sachs' almost 26% market share. In spite of this, Deutsche Bank's average deal was valued at $3.5 billion, whereas Goldman's average worked out to just under $2.9 billion.


  1. Google Finance - Bear Stearns Companies (BSC)
  2. Google Finance - Deutsche Bank (DB)
  3. Deutsche Bank 3Q Profit Rises - MSN Money
  4. Deutsche Bank Interim Report as of September 30, 2007 - Fact Sheet
  5. Deutsche Bank Interim Report as of September 30, 2007 - Segmental Results of Operations 9M2007
  6. Deutsche Bank AG (DB) Income Statement -
  7. Historic Lookup
  8. Pound Falls for Second Week Against Euro on Rate Differential -
  9. Deutsche Bank Annual Report 2006 - Results by Segment
  10. Monthly Average Graph (Euro, American Dollar) 2007
  11. M&A Bubble Bursts -
  12. M&A Bubble Bursts -
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