Deutsche Bank and the Road to Basel Iii

Abstract

This public-sourced case was named the best finance case of 2013 in the 24th annual awards and competition sponsored by The Case Centre. It was designed for and works well in the latter portion of a GEMBA Financial Management and Policies course and in the early stage of a second-year MBA elective Financial Institutions and Markets course. The case is set in mid-2012 as the new co-CEOs of Deutsche Bank are about to speak in an analyst call. Students are the decision makers and have the opportunity to evaluate the various factors affecting a bank's situation in a changing global industry, such as leverage and credit quality, as well as to discuss the implications on Deutsche Bank and the banking sector more broadly of Basel III, the global regulatory reform. The students also have the opportunity to conduct a valuation of the bank. Investors were anxious to know whether the new co-CEOs would discuss the strategy of how Deutsche Bank planned to meet the new regulatory requirements, what effect Basel III would have on the company's profitability, and what lines of business it would focus on going forward in a new banking environment. They also wanted to know more about the benefits of the 2010 majority stake investment in Postbank, a German commercial bank. In class, this discussion also allows for a broader examination of the universal bank model and the role of banks within society. Excerpt UVA-F-1695 Rev. Jan. 28, 2019 Deutsche Bank and the Road to Basel III On July 31, 2012, Deutsche Bank Group (Deutsche Bank) reported its 2nd quarter 2012 financial results. What made this earnings report different from the company's past earnings announcements was that it marked the first time after former CEO Joseph Ackermann stepped down that co-CEOs Jurgen Fitschen and Anshu Jain would publicly address investment analysts and shareholders on Deutsche Bank's quarterly conference call since assuming their roles on June 1, 2012. The biggest question on the minds of analysts and investors was whether or not Deutsche Bank would be able to meet the capital requirements imposed under a revised global banking regulatory framework—Basel III. In response to the global financial crisis, the Basel Committee on Bank Supervision, consisting of senior representatives of the G20 central banks, began formulating the new framework in an effort to raise “the quality, consistency, and transparency of the capital base” of financial institutions worldwide. Although approved in December 2010, the new requirements would not take effect immediately. Rather, the various requirements would be phased in gradually, beginning in 2013 and becoming fully implemented by January 1, 2019. For banks, Basel III meant clearing a series of regulatory hurdles starting in 2013 that would fundamentally change the banking industry landscape. Investors were concerned that Deutsche Bank would need to raise fresh equity capital to meet the requirements, thereby diluting the equity value of existing shares. In addition, profitability in the banking sector had been in steady decline since the global financial crisis of 2008, and investors worried that stricter capital requirements would further reduce profitability at Deutsche Bank going forward. And the sovereign debt issues plaguing many European Union countries added more insecurity. . . .