Deutsche Bank Gets Smaller

Deutsche Bank has joined the “smaller and simpler” movement. After missing financial targets and facing regulatory problems, the German bank said on Monday (April 27) that it will sell its retail banking business, shrink its investment bank and leave seven of the 70 countries where it does business, Reuters reported.

That follows HSBC management’s statement to investors on Friday (April 24) that profits will improve now that it has cut 77 businesses to streamline the bank in the past four years. Credit Suisse is also expected to slash trading operations under new CEO Tidjane Thiam, and new Barclays chairman John McFarlane indicated on Thursday (April 23) that his bank will shrink, too. Citigroup, Morgan Stanley, UBS and Royal Bank of Scotland have all made big cuts in recent years as well.

While pressure to downsize has increased since the global financial crisis, it’s not new. Bank of England chief economist Andy Haldane said in 2009 that “there is not a scrap of evidence of economies of scale or scope in banking — of bigger or broader being better.”

But unwinding years of expansion has turned out to be difficult, while regulators have stepped up pressure and investors have complained that big, complex banks don’t generate enough return on equity, while simpler banks do better. Wells Fargo, which focuses on U.S. retail and commercial banking, is now the world’s biggest bank by market cap and trades at 1.6 times book value. In the U.K., Lloyds has a similar focus and its shares also trade at a big premium to rivals. Deutsche Bank trades at only 0.6 times book value.

Regulators are pushing too, tagging large, complex banks as systemically important financial institutions. That has led General Electric to slash its banking operations, which by themselves make GE the seventh-largest U.S. bank. Other U.S. banks have also slimmed down, though JPMorgan Chase CEO Jamie Dimon has refused — and argued vehemently against shrinking.

Some bankers now argue that simplification and reduction in size could leave only three truly global banks: HSBC, JPMorgan Chase and Citigroup.