Sachs appeal

Deutsche may wind up as Europe's Goldman Sachs

Deutsche Bank could become Europe's answer to Goldman Sachs. The German lender could consider a gradual stock market flotation of its retail banking arm should European lawmakers push through ring-fencing reforms, Reuters reported on January 14. If so, Deutsche would be upping its bet on a rebound in fixed income trading.

Even a partial sale of the retail business would represent a big U-turn for Deutsche. Former boss Josef Ackermann's acquisition of Postbank was about rebalancing towards consumer banking. If the wider retail arm was sold in full, Deutsche's investment bank would account for 62 per cent of core group revenue, up from 43 per cent now. That would leave a Goldman-style investment bank/asset manager with a transactions business tacked on.

Such a move wouldn't contradict Deutsche's strategy, though. While other European groups like UBS and Barclays are shrinking their investment banks, the bank last year confidently called the current fixed income slowdown as merely cyclical. In any case, its relative weakness outside trading and advisory meant it had less of a choice.

Offloading retail could increase Deutsche's earnings volatility. But it could also shore up its balance sheet. German mortgages are low-risk but capital intensive: the division accounts for 15 per cent of group leverage exposure, UBS analysts reckon. Value the business at nine times its estimated earnings, like peer Lloyds Banking Group, and Deutsche's retail arm could fetch euro 14 billion, based on annualised 2014 profit numbers. Selling the whole thing could increase Deutsche's Basel III leverage ratio from its current 3.2 per cent to 3.8 per cent.

The Goldmanisation of Deutsche is far from a done deal. Lobbyists could water down ring-fencing reforms. Or the group could sell off just Postbank, or retain a sizeable stake in its overall retail business. Deutsche co-Chief Executive Juergen Fitschen said on January 14 that it was right to pursue a universal banking model.

Still, BNP Paribas, which is aiming to grow in Germany, might be tempted to offer Deutsche a big sum for the whole unit. And having bet the house that investment banking is the way forward, Deutsche may as well double down.