In a bid to make up for lost time and improve profits, Deutsche Bank plans to double its assets in the' United States to $50 billion by the year 2000 and transform itself from a commercial bank into an investment bank.
Staff will grow over the same period from around 1,500 to 2,500, said John A. Rolls, president and chief executive for North America. The bank also aims to quadruple profits, he added.
In a recent interview with American Banker, Mr. Rolls said growth would he achieved mainly by adding to the bank's securities portfolio and developing new operations.
New businesses will be built by hiring financial experts and investing heavily in technology. Lending, which until recently constituted the mainstay of the German bank's U.S. operations, will take a secondary role, he said.
"As we grow, lending will be a smaller part of our business and serve mainly as a platform for developing other relationships," Mr. Rolls said. "We want to become a world-class link in Deutsche Bank's global network." Mr. Rolls listed seven areas Deutsche Bank has slated for buildup:
* Foreign exchange and derivatives trading.
* Fixed-income bond trading.
* Equities underwriting, particularly for the middle market.
* Securities trading and underwriting, including Yankee bonds for European borrowers as well as equity offerings for companies being privatized.
* Asset management.
* Asset-based lending.
"There isn't going to be much financial product in the future that doesn't have some synthetic element," the 53-year-old banker remarked.
As part of the move toward realizing its program, Deutsche Bank has begun trading in fixed-income derivatives and plans to have an equity-related-derivative operation up and running by the end of this year. Mr. Rolls is particularly enthusiastic about asset-based lending, which he believes could play a major role in bank lending in the future.
"I'm a firm believer in the future for asset-backed lending," he said. "People who need to borrow don't necessarily have the best credit rating."
Securitization of mortgages, lease financing, trade receivables, and middle-market lending will be an equally important part of Deutsche Bank's business in the future, he added.
The triple-A rated, Frankfurt-based bank is the world's 10th largest, with yearend assets of more than $322 billion. North American operations had $26 billion of assets and ended the year with revenues of $454 million.
Although a major force in European finance, Deutsche Bank has gotten off to several false starts in the United States and has been slow to make its mark.
"It's always been the case that Deutsche Bank has not pulled its weight in the United States given its dominant position in Europe," observes Bryan Crossley, a banking analyst with Hoare Govett in London. "But I think Deutsche has realized that it cannot be a global bank while remaining absent from the United States."
"There's an element of defense as well as offense in their strategy," says Ian Mcewen, an analyst with Merrill Lynch in London. "They know they need to come out of their niche and build a decent presence in the United States."
The bank dates its history in the United States to 1883, when it took an equity stake in the Northern Pacific Railroad and began organizing U.S. railroad loans, but it did not establish U.S. offices until 1968, when it joined a consortium of continental banks to set up European American Bank.
Deutsche Bank subsequently started a U.S. investment banking unit in 1971, a branch in New York City in 1978, a subsidiary in Toronto in 1981, and branches in Chicago and Los Angeles in 1988 and 1990.
Meanwhile, the European American Bank came to an unhappy end in the 1980s, after it lost hundreds of millions of dollars on problem Third World loans and real estate lending.
In 1990, Deutsche Bank sold its 23% stake to Holland's ABN Amro, which also bought out the other shareholders and took full control of the bank. The link to European American, Mr. Rolls said, set Deutsche Bank back several years.
"We might have been further along had we been more aggressive," he reflected. "We finally hung out our own shingle in 1978."
Pursuing a conservative strategy managed by German expatriates who focused mainly on lending to large U.S. companies and avoiding losses, Deutsche Bank's earnings in the United States stayed mediocre throughout the 1980s.
"More than 50% of our earnings are from corporate lending, which has had a pretty anemic ROE," said Mr. Rolls. "We are not as profitable as we should be."
He declined to disclose how much the bank earned in the United States last year, but said Deutsche Bank was only "half as profitable as its U.S. competitors in terms of return on equity."
Analysts attribute Deutsche Bank's new willingness to expand into investment banking in the United States to the purchase of the London-based merchant bank Morgan Grenfell several years ago and to the influential role of Morgan Grenfell's chairman, John Craven.
As part of the move toward building a more profitable bank that will assist corporations going directly to capital markets for their borrowings, Deutsche Bank last October relinquished its right under the 1978 International Banking Act to run a separate U.S. investment bank.
The bank also merged three U.S. units - C.J. Lawrence. Deutsche Bank Capital Corp. and Deutsche Bank Government Securities - into a single unit with Section 20 corporate debt and equity underwriting powers.
The banker pointed out that Deutsche Bank, like other banks, is being driven into investment banking by changes in financing.
According to research by the bank, domestic and foreign bonds represented 28% of some $2.3 trillion in total U.S. corporate capital outstandings in 1983.
By 1993, that percentage had climbed to 43% of some $5 billion in outstandings. Commercial and industrial loans, meanwhile, declined from 46% of the total in 1983 to 32% in 1993.
Despite the seemingly paradoxical move, Mr. Rolls said Deutsche Bank lost little by giving up its right to engage in investment banking via a separate company.
"Nobody's ever done much with a grandfathered investment banking subsidiary," Mr. Rolls noted. "I looked at it and thought to myself: This railroad's going nowhere."
"They decided to have one bigger presence rather than three little ones that-weren't too well coordinated," observed John Leonard, an analyst with Salomon Brothers Inc. in London.
Mr. Rolls predicts other foreign banks will likely follow Deutsche Bank's lead. "Some believe that in due course Glass-Steagall will be revised and foreign banks will have to give up their grandfathered rights," he said.
A former Corporate executive, Mr. Rolls joined Deutsche Bank in November 1992 from United Technologies, where he had been executive vice president and chief financial officer since 1986.
As head of Deutsche Bank North America Holding Corp., the entity set up in 1992 to coordinate North American operations, he is responsible for the hank's New York, Chicago, and Los Angeles branches, Deutsche Bank Canada, Deutsche Bank (Mexico), and all subsidiaries of the bank's North American holding company, including Deutsche Bank Securities Corp., Deutsche Bank Financial Products Corp., and Deutsche Credit Corp., an asset-based lending unit.
Born in Hamilton, Ontario, Mr. Rolls grew up in Mexico City and Cincinnati and holds an undergraduate degree from Ohio State University and a master's degree in finance and marketing from Columbia.
He admits to being surprised, but not displeased, by skepticism that Deutsche Bank will ever really become a significant force in the U.S. banking market.
"We tend to be very circumspect in the way we report ourselves," he admits. "But there's nothing I like better than to be underestimated by the competition."
Salomon's Mr. Leonard points out that Deutsche Bank still faces challenges here.
"They've got to improve their origination and distribution for non-German based products and broaden their business beyond a German base," he said. "It's something a lot of other foreign banks are trying to do and there's a lot of competition around."
"There's a cultural question over whether they would be willing to give local people the ability to project an American identity and let locals meet the targets set for them," said Hoare Govett's Mr. Crossley. "They tend to be control freaks."
Mr. Rolls admits that achieving Deutsche Bank's objectives will not be an easy task.
"This is a mature market and for us to grow is difficult," he said.
But he also believes the odds are in favor of Deutsche Bank and that the bank's triple A rating and worldwide network give it an edge.
"Assuming the-markets don't crater we, should be able to reach our goal."
Analysts reach a similar conclusion. "They take a long time to come to a decision but once they do, they're like a juggernaut that gets rolling," said Mr. Crossley.
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