european investment banking analysis

& European Investment Banking Analysis 2001

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PMBA2959 International Field Project

Dr. Ali F. Farhoomand

European Investment Banking Analysis 2001 –

By

Class : MBA 32

Name : Clara Lam Hiu Ying 1999931357 Daisy Lam Siu Yung 1991011034 David Kwok Tsz Wah 1999930767 Lois Sze Woon Sang 1999930559

Date : 12 June 2001

&


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Table of Content

I. Executive Summary

II. Introduction

III. Background of Investment Banking A. Definition of Investment Banking

B. Characteristics 1. Size

2. Profitability 3. Growth Prospect

C. Current Trends D. Prospects for Growth

E. Factors of Success F. Factors of Risks

IV. Marco Analysis on Banking System in Switzerland and Germany

A. Switzerland Banking System

B. Germany Banking System

V. Mirco Analysis on Credit Suisse First Boston and Deutsche Bank

A. Company Background

1. Credit Suisse Group 2. Credit Suisse First Boston

B. SWOT Analysis

1. Strengths 2. Weaknesses

3. Opportunities 4. Threats

C. Company Background

1. Deutsche Bank


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D. SWOT Analysis 1. Strengths

2. Weaknesses 3. Opportunities

4. Threats

VI. Conclusion


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I. Executive Summary The focus of this report is on the investment banking industry in Europe. To start with,

the background of investment banking by generally summarizes its past development is presented. A definition is then provided to facilitate the understanding of the industry.

The characteristics are also discussed. These parts form the basis of understanding the current trends and tracing the growth prospect of the investment banking industry. It is

also worthwhile examining the success factor s as well as the risk factors

Based on the visit to Switzerland and Germany in the international field trip to Europe in May 2001, a macro analysis on the banking system of both Switzerland and Germany

is conducted. This analysis depicts a general picture on how the banking system in these two countries works. Moreover, the visit to Credit Suisse Group and Deutsche

Bank provided further valuable information in conducting the micro analysis on investment banking. The analysis of the investment arm of t hese banks is done through

the SWOT analysis. . Hopefully the reader of this report will have a better understanding on how investment banking works in Switzerland and Germany as well

as in Europe in general.


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II. Introduction It is expected that investment banking will continue be a growth industry and will grow

faster than Gross Domestic Product (GDP). As the lines between investment and commercial banking are blurring, several trends are now in place and make commercial

and universal banks, including Europeans, more competitive than in the past.

In this report, we will focus on investment banking and analyze its trends, prospects, success factors and risk factors. As we visited two European banks, namely Credit

Suisse Group (CS Group) and Deutsche Bank (DB), in the international field trip to Europe in May 2001, a SWOT analysis will be provided on these two banks which have

also developed their investment banking.

III. Background on Investment Banking The 1990s were an exceptional decade in terms of growth of financial activity for

investment. Most area experienced double -digit return over the past decade and activities concerning investment banking is particularly strong in the latter half of

1990s. By 2000, global investment banking revenues were approximately US$200 billion, about 0.6% of world GDP. Global equity turnover has increased from US$10

trillion in 1990 to US$60 trillion in 2000. The top 15 players1 in the field share 60% of the available revenue.

A. Definition of Investment Banking Most people consider that investment banks are something helps companies and governments issue securities, help investors purchase securities, manage financial

assets, trade securities and provide financial advice. In fact, investment banks include sale s and trading operations, and in some cases, elements of the wholesale

or commercial banking operations. But in divisional term, where there is an investment banking division, it usually has a narrower meaning relating primarily

to equital markets, debt capital markets and merger and acquisitions. US banks such as Goldman Sachs, Morgan Stanley Dean Witter, and Merrill Lynch usually

group such revenues under investment banking. Similarly the wholesale 1 MSDW, CSFB+DLJ, Goldman Saches, JPMorgan Chase, Merill Lynch, CSFB, CitiGroup, Deutsch

Bank, UBS Warburg, Lehman, DrKW, BNP Paribas, ABN AMRO, Société Générale, and Barclay are

the top 15 players. (Source: Deutsche Bank Research)


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super-divisions of European such as Credit Suisse (Credit Suisse First Boston) and

Deutsche Bank (Global Corporates and Institutions division) have sub-divisions for narrow definition investment banking.

B. Characteristics Faced with the erosion of European traditional banking franchise, many European banks have to develop in new areas where have promising prospects. Many banks

find investment banking attractive because of its size, profitability and growth prospects.

1. Size

The revenues of investment banking amounted to about US$200 billion in 2000, i.e. 0. 65% of global GDP. The main components were shown in the following

globe.

Figure 1 Global Revenue for Investment Banking

(Source: HSBC Research)

In addition, further revenues come from private equity, loan syndication and other related services. It is estimated that these numbers equate to almost twice

the net interest income earned on the mortgages in both the US and Europe. The investment banking revenues are concentrated among the top 15 players who

account for over 60% of these revues with the leading players enjoying about 5% to 8% market shares. The largest European players, however, have market

shares of less than 2%.

Global Revenue for Investment Banking

Equi ty sa les & trading

4 4 %

Fixed Income and other sales and

trading2 8 %

Primary business1 5 %

Merge r & Acquisi t ion

13%


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2. Profitability Investment banking has earned attractive return on equity. US securities house

earned return on equity above 15% for the past decades. In 2000, it made a return of equity of about 19%. In recent years, the competitive pressure has

begun to erode the high return of equity earned by some banks from their traditional core domestic franchises. Fewer barriers to entry and increase in

consumerism have play a role in driving returns lower. Meanwhile, traditional loans and deposit business has grown much slower. During 1990 to 1999, bank

lending to European house grew at only 6% yearly and their deposits increase at just 5% per year. This compares to 14% annual growth of equities held and

24% annually for mutual funds. Given these trends, it is not surprising that European banks have pursued security related business. Some European banks

emphasizing investment banking have started to benefit from the improve return on equity. One of the examples is Deutsche Bank.

3. Growth Prospects

Investment banking has exhibited growth in double -digits in the past decade. In some areas, acceleration was spotted especially in the latter half of the decade as

reflected by the following table:

Types of Activities 1990 – 2000 % of Growth p.a.

1995 - 2000 % of Growth p.a.

Volume of Merger and Acquisition

+19% p.a.

+26% p.a.

Primary Equity Issuance +23% p.a.

+23% p.a.

Primary Debt T urnover +25% p.a.

+25% p.a.

Cash Equity Turnover +25% p.a.

+25% p.a.

Syndicated lending +15% p.a.

+15% p.a.

Table 1 (Source: Merrill Lynch Research)

A number of trends have accelerated the growth of investment banking. These

include growing disintermediation, shift from cash deposits to mutual funds,


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shift towards equity products, growing personal wealth as well as demographic

and political change.

C. Current Trends The ending of the regulatory boundaries between commercial banks and investment

banks has blurred the requirements that their customers are different. Large corporate customers increasingly prefer using investment banking services to

commit their balance sheet and taking fees. Meanwhile commercial banks are insisting that they will only commit their balance sheets if there are matching fees.

Although investment banking has been a less capital intensive, signs appear that it is becoming more capital intensive. Apart from the increasing number of corporate

clients, the need for capital in secondary trading has also increase.

Investment banks spend a lot of money on designing and developing new technological and trading platforms. It is generally estimated that there are over 80

new joint venture trading platforms and that the cost of building each platform could be US$50 million upward. At the same time, banks need to invest in their

own propriety systems via online trading platforms to gain a competitive edge.

North American markets have traditionally dominated the global security markets. Nevertheless, European securities markets have been growing in importance. The

introduction of the single currency, Euro, has created a savings pool to rival against US. European universal banks are in better position in exploiting this trend. One

advantageous area of European universal banks over US investment banks is in distribution. In Europe, commercial banks tend to dominate the distribution of

mutual fund. In Germany, France, Italy, Spain and Switzerland, banks have 80% or more market share in this area.

Twelve months ago the investment banking boom was at its peak. Nevertheless,

with a slowing global economy, financial markets have reacted savagely. Volumes in many areas are significantly down last year. Major European investment banks

and asset managers have fallen by 15% or more since end January 2001. This already accounted for a 10-20% decrease in the value of asset management and

investment banking business. Although activity is down currently, it still remains healthy against longer run averages.

D. Prospects for growth Despite current financial turmoil and declining growth rates, global investment


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banking revenues could grow by 80% in the next 10 years. It is estimated that

Europe would account for half of the global revenue growth. One of the key future trends is the likely cooperation between Europe and North American on financial

assets. There is sign of potential for the pool of investment banking revenues to grow from an estimated 0.7% of GDP in Europe at present to around 1% of GDP.

The following factors will keep the growth of the investment banking for Europe

?? Privatization, initial public offers and demutualisaitons ?? Increase personal wealth and changes in age structure

?? Political change and pension reform ?? Growth in financial assets and securities in the economies of central and eastern

Europe ?? Increase in turnover relative to market capitalization

?? Continue downward pressure on margins

E. Factors of Success Even though the volumes in most areas are down so far in 2001, increased

securitisation would be a long term trend for investment banking. This section looks at some key drivers contributed to the success in investment banking.

1. Management

The skills required to manage an investment bank are very different from those required to manage a commercial bank. This is partly because investment

banking demands a more flexible and entrepreneurial approach. Some of the specific areas of investment banking where different approaches are required

are highlighted below.

High cost-income ratio business Investment banking tends to have higher costs relative to revenues than

commercial banking. Even for successful players, personnel costs tend to be about 50%.

Good staff

Opportunities in investment banking fluctuate and, therefore, investment banks need smart staff in place to handle them.

Flexibility

To succeed, companies need to have flexibility to cut back in areas where there


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is a lull in business.

2. Risk Control

Market risk and operational risk are more important for in vestment banking. Having the ability to control risk, the investment banks have greater chance for

success.

3. Distribution Ownership of a large asset management operation can create additional revenue

generation opportunities for investment banks. Securities lending and borrowing can also be a significant revenue source. Investment banks are also

increasingly manufacturing new products based on derivatives, guarantees and non-directional strategies. Rich private banking consumers are the target group

for the new product.

4. Capital Investment banking need access to modest amounts of capital. The capital

needs for merger and acquisition and advisory businesses are minimal.

F. Factors of Risk In this section, the risk factors relating to investment banking are discussed. Higher

return of investment banking is associated with higher volatility, lower sustainability and a higher cost of equity. Even after overcoming the first stage of

making enough investment banking revenues to cover the build-up cost, European investment banks may not be able to generate high return on equity to create value.

Operational risk is important for investment banking. A successful investment

bank would find it difficult to reduce personnel costs. When other costs are added, the cost to income ratio will be higher. The drive towards reduced capital

requirement and lower credit risk assumption by originating and distributing as opposed to buying and holding loans also increase operational risk.

Sub-syndication and securitisatio n make counterparty risk less serious but also

make it more difficult for markets and regulators to track who has assumed the risks. Even though information on who originated the syndicated loans and bond issues is

publicly available, the identity of the last holders is not public.

Many players in investment banking also exposed to retail risks. The exposure of


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European banks to investment banking closely carry correlated market exposure

through their asset management and retail securities businesses. A prolonged bear market would not only wipe out investment banking profits, but also have a

negative effect on the growth of other market related business.


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IV. Marco Analysis on Switzerland & Germany Banking System

A. Switzerland Switzerland has a highly developed banking system encompassing approximately 372 registered banks, of which about 150 are subsidiaries or branches of foreign

banks and financial service companies. As Swiss banks have continuously expanded their worldwide networks over the past two decades, many foreign banks

have established a Swiss presence in order to participate in this important financial center.

The foreign banks include leading institutions from Europe (85 banks), Japan (24

banks) and the Middle East and Indian subcontinent (7 banks). Currently there are 24 U.S. and Canadian banks represented in Switzerland, accounting for 20 percent

of total assets of foreign banks in Switzerland. The physical presence of U.S. financial entities in Switzerland is vital to successful financia l service trade and

continues to play an important role in financial services competitiveness.

A large number of foreign banks operate in the Swiss market either through closely held, incorporated entities (the majority) or through branches of an offshore group

entity. The main reasons for foreign banks to operate in the Swiss market, apart from image and prestige, are:

?? to provide foreign banking services to their domestic customers

?? to maintain a presence in one of the most important and stable financial centers in the world

?? to solicit business from Swiss companies operating in their own country (for example, loans to foreign subsidiaries of Swiss companies operating in their

home country) ?? to participate in the capital markets

?? to provide private banking services to non-resident nationals of their own countries and other nationalities where possible

?? to take advantage of the comparatively low interest and tax rates prevailing in Switzerland, by borrowing funds in the country for re-lending abroad.

Like 1998, 1999 was again a very successful business year for the Swiss banks.

Gross profit rose by 13.1% (1998: +8.4%) to SF 26.3 billion ($16.5 billion). The annual profits increased by 19.6% to SF 17.3 billion ($10.8 billion). Brilliant

results were achieved in commission business and services, which expanded by


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8.7%, and in trading, which soared by 116.9% (1998 +10.1% and -39.3%

respectively).

The banks total staff in Switzerland expanded for the first time in ten years, reaching a level of 119,597 persons. Some categories of banks recorded substantial

growth rates: brokerage banks had 23.2% more staff on their payroll than in 1998, private banks 11.9%, trade banks 9.9%, aiffeisen banks 6.5% and the cantonal

banks 1.5%.

Source: US Department of State FY2001 Country Commercial Guide

B. Germany Banking System Germany has a modern financial market sector but is often considered overbanked.

For example, it has twice as many bank branches per capita as does the United States. The banking system is sound and healthy and a gradual process of

consolidation is underway. However, it is dominated by public sector financial institutions. The total assets of 2,987 financial institutions that reported in January

2000 were 5.8 trillion Euro. The 290 reporting commercial banks accounted for 1.5 trillion euro of this amount. The four largest commercial banks (Deutsche Bank,

Dresdner Bank, Commerzbank, and Bayerische Hypo- und Vereinsbank) accounted for about 57 percent of total commercial bank assets.

Credit is available at market-determined rates to both domestic and foreign

investors and a variety of credit instruments are available. Legal, regulatory, and accounting systems are generally transparent and consistent with international

banking norms, although the German accounting system is sometimes criticized for being less transparent than the U.S. system.

Germany has a universal banking system that is effectively regulated by federal

authorities. Germany has a basically non-discriminatory, well developed financial services infrastructure. Germany universal banking system allows the country

more than 45,000 bank offices not only to take deposits and make loans to customers, but also to trade in securities. The traditional German system of

cross-share holding among banks and industry, as well as an undeveloped equity market and a high rate of bank borrowing dictate that German banks exert

substantial influence on industry.

There is current discussion on whether or not the banks influence should be


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diminished, but given the overall conservative nature of the financial system and its

successes in the past it is unlikely that profound changes will result. Private banks control roughly 30 percent of the market, while publicly-owned savings banks

controlled by state and local governments account for 50 percent of banking turnover, and cooperative banks make up the balance.

All three types of banks offer essentially the same, full range of services to their

customers. An array of specialist banks finance homeowner mortgages, provide guarantees to small and medium-sized businesses, finance projects in

disadvantaged regions in Germany and guarantee exports to developing countries.

Source: US Department of State FY2001 Country Commercial Guide


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V. Mirco Anaylsis on Credit Suisse First Boston and Deutsche Bank

A. Company Background

1. Credit Suisse Group

Credit Suisse Group (CS Group) is one the world's leading global financial services companies. Credit Suisse Group is headquartered in Zurich since 1856.

Its registered sha res (CSGN) are listed on the SWX Swiss Exchange, in Frankfurt and Tokyo. The Group employs around 80,000 staff worldwide.

Financial Services, Private Banking, Asset Management and Investment Banking are the core businesses for the Credit Suisse Group. Under financial

services, it covers Winterthur Insurance, Winterthur Life & Pensions, Credit Suisse Banking, Credit Suisse Personal Finance and Credit Suisse e-Business.

Private Banking specialises in providing personal investment counselling and professional asset management for high-net-worth-individuals. Asset

Management focuses on mutual fund and provides portfolio management advice around the world. Credit Suisse First Boston (CSFB) is the investment

arm of the Credit Suisse Group. Its businesses include securities underwriting, sale and trading, investment and merchant banking financial advisory services,

investment research, venture capital, and brokerage services for financial institutions and online brokerage services. In the following SWOT analysis, the

focus will concentrate CSFB.

2. Credit Suisse First Boston CSFB is a leading global investment bank serving institutional, corporate,

government and individual clients. CSFB's businesses include securities underwriting, sales and trading, investment banking, private equity, financial

advisory services, investment research, venture capital, correspondent brokerage services and retail online brokerage services. It operates in over 87

locations across more than 39 countries on 6 continents, and has some 28,000 staff worldwide. In terms of financial resources, CSFB has approximately

$12.2 billion in revenues in 2000 and $10 billion in equity and $410 billion in assets as of December 31, 2000. The Firm is organized around the following

four major ope rating divisions. They are the Investment Banking, Fixed Income, Equity and Private Equity. CSFB is a wholly owned subsidiary of

Credit Suisse Group, based in Zurich, Switzerland. It is regulated by the Swiss banking authorities and complies with the high standards they set for capital

coverage and risk management.


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B. SWOT Analysis of the Credit Suisse First Boston (CSFB)

1. Strengths

I. Strong Global Mergers and Acquisitions (M&A) CSFB’s Mergers & Acquisitions Group is one of the world’s top M&A

advisors. In 2000, the group advised on 700 transactions with a total value of more than $900 billion. CSFB senior executives have advised on many

of the most significant deals of each year, spanning two major merger booms. The group also creates unique structures and develops new tactics

to get difficult or complicated deals done. In fact, the group is responsible for devising many of the methods of executing transactions - both hostile

and friendly - commonly used today. Also, in 2000, CSFB ranked third worldwide in dollar volume of M&A transaction, with a market share of

27.0% up from fourth, with a market share of 15.4% a year earlier. CSFB was named the best firm in M&A advice in Institutional Investor's most

recent CFO survey. CSFB is now behind Goldman Sachs, Morgan Stanley Dean Witter and Merrill Lynch (MER: Research, Estimates) in the global

M&A race.

II. Strong Global Initial Public Offerings (IPOs) The Credit Suisse First Boston Private Placement team lays the groundwork

for successful IPOs by providing growth-equity for expansion through high-quality private and strategic investors, and raising a company’s profile

within the institutional investment community. CSFB is the #1 market share over the last three years, with more than 26% of total placements

measured by volume for 2000 and has raised $2.9 billion in 1999 and $5.3 billion in 2000 on behalf of a total of 150 issuers of private equity capital. In

the technology side, it is the largest dedicated equity placement group worldwide, with 40 professionals, of whom 17 are focused exclusively on

technology. More, CSFB had jumped to the top rank of net underwrite in the last two years. Last year, CSFB had underwritten four of the nine

Internet-related initial public offerings scheduled within a week. The rest was swallowed by Morgan Stanley Dean Witter and Goldman Sachs. Now,

CSFB had become the second-largest market share for Net IPO underwriters, behind Goldman but ahead of Morgan Stanley.


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III. Strong Research Team

A key to above success for CSFB is its research team. Only the technology group research, it already has 54 senior analysts worldwide covering over

500 companies, CSFB has more analysts in more regions, covering more sectors than any other firm. CSFB has their own integrated, cross-sector

team approach, combined with individual analysts' strong technical backgrounds, makes for far more comprehensive research coverage. In the

U.S. last year, CSFB's technology analysts were once again recognised by the industry with 7 Institutional Investor All-America Research team

awards, 8 Greenwich Survey top-five rankings and 22 Reuters Survey top five rankings. In Europe, CSFB's Software & Computer Services and

Information Technology research teams were ranked #1 by Reuters. The European team also claimed 2 Institutional Investor awards and 4 Extel

awards. CSFB's All-Asia Technology Research was ranked #1 by Institutional Investor and The Asset 2000. The Asia team also received 3

Asiamoney top-three rankings. With the help of the research analysts, CSFB will definitely has strong M&A and IPOs.

2. Weaknesses

CSFB appears to have missed out on the shift to automation of smaller trades, derivatives and money market business, given its traditional strength in more

complex products. After a management reshuffle in May 2000, this problem was beginning to be addressed. Another area of weakness has been the

volatility of results and high market risk. CSFB continues to be heavily involved in emerging markets, but since the Russian crisis it has considerably

reduced its exposure, to come more in line with its peer group. Secondly, European investment banks have often had opportunities to develop, but they

have historically seemed incapable of controlling costs as flexibly as the US houses. In short, CSFB has two sorts of problems of inability to reduce costs

when revenues turned down and the need to bid up for talent, while not having the revenues to cover costs. European investment banks have therefore been

seen as chronically disadvantaged in cost-income ratio terms.

3. Opportunities Technology is, and will continue to be, a critical component of change in the

business world. CSFB is heavily involved with technology innovation in two levels. First, it enables innovation throughout the world by bringing technology

clients to market, helping them to finance growth, and advising them on


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strategic transactions that help them position themselves in a highly competitive

business environment. Second, it works continually to take advantage of new ways of employing technology within its own industry and within the firm, so

that it can serve client better by being more productive. In 1998-1999, CSFB achie ved the goal of building the world's leading franchise in technology

investment banking; in 2000, it sustained its number one market share position in this arena, establishing a brand advantage that is being increasingly

recognised. Beyond the Technology Group, CSFB's deployment of technology extends to the on-line brokerage unit and its technology affiliates. This first

mover advantage will definitely provide further business opportunities for CSFB to make strategic alliances. More, one of the historic strengths of US

investment banks has been their placing power in their domestic market. For many types of instrument, the US capital market was the only place where a

sufficiently deep market existed. The growth of the securities markets in Europe, and the implementation of the euro in wholesale markets from 1999,

has created new opportunities for CSFB to exploit placing power in Europe. In addition, the merger of Donaldson, Lufkin & Jenrette (DJL) in fact would help

CSFB to penetrate into the US market. In addition, the merger of DJL in fact would help CSFB to penetrate into the US market. Integration of DLJ

successfully completed in 2000. In the US, CSFB is now ranked no. 1 in equity and high yield research, equity trading and high yield underwriting. Ranked no.

2 in equity underwriting and mergers and acquisitions (M&A).

4. Threats

In fact, CSFB suffers a serious problem of vying good staff due to her mergers and acquisitions inside the company. So far, Salomon has hired over a dozen

bankers from DLJ since it was acquired by Credit Suisse in August 2000. Lehman Brothers (Lehman Research, Estimates) has reportedly hired over 200

former CSFB or DLJ employees, while Bank of America (BAC: Research, Estimates) has lured a team of two dozen. Deutsche Bank AG has signed up 12

senior executives. Even though, Credit Suisse does not admit this was a loss to the group and the retaining these people created a big increase in cost, we would

find that the high turnover would affect the moral of the company since human resource in fact was the treasury for a company. On the other hand, the loss of

valuable personnel to other competitors will also post a threat to CSFB since those key holders posse insider and high level of company information.


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C. Company Background

1. Deutsche Bank

Deutsche Bank is one of the leading international financial service providers. With more than 98,000 employees, the bank serves more than 12 million

customers in more than 70 countries worldwide; almost 50% of the bank’s staff work outside Germany.

As a multi-specialist bank, Deutsche Bank offers its customers a broad range of

modern banking services. The bank is available to its personal and private clients with an all-round service ranging from account-keeping as well as cash

and securities investment advisory to asset management. The bank offers its corporate and institutional clients the full range of international corporate and

investment bank from payments processing and corporate finance to support with IPOs and M&A advisory. In additional to that, the bank has a leading

position in international foreign exchange, fixed-income and equities trading.

Deutsche Bank realigned its organizational structure on February 1st, 2001 to strengthen its customer focus with the objective to promote profitable growth

and continue its strive to be the world’s best financial services company. The bank organized its business in two Groups, Corporate & Institutional Clients

Group and Asset Management & Private Clients Group.

The Corporate & Institutional Clients Group combines all of Deutsche Bank’s corporate and investment banking, real estate and institutional businesses. This

Group will strengthen its origination platform, make more efficient use of capital, and accelerate growth in fee-based businesses. The group will continue

to build its highly successful trading & sales operation. With the objective to provide integrated customer solutions all security services, cash management

and trade finance businesses will be concentrated as Global Transaction Services in this Group underlining Deutsche Bank’s determination for

leadership in this area.

The Asset Management & Private Clients Group will comprise all of the asset management businesses and private client businesses including Deutsche Bank

24, Private Banking, DB Alex. Brown Private Client Services and other retail distribution. This will create a leading asset gathering and distribution platform

on a global scale. Further focus will be given to aggressively build e-brokerage


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and alternative investment capabilities and harmonize infrastructure and

investment processes.

The realignment of Deutsche Bank into two customer-oriented business groups is an important step towards additional growth by enhancing the business model.

On the one hand, the bank serves corporate and institutional clients with attractive financial products and services from one source. On the other hand,

the bank has combined its services to private clients with its private and institutional asset management business in Asset Management & Private

Clients. In doing so, the bank has created the basis for taking a leading position in the growth trends of the future: in the fields of personal and institutional

retirement provision, in broad wealth accumulation and in clients’ growing demand for advisory services in the face of the increasingly complex field of

wealth optimization. After becoming a world leader last year in investment banking, the bank sees additional growth potential in the field of Asset

Management & Private Clients, which will lead to improved balance in the profile of the Group’s revenue.

It is convinced that with the enhancement of the organizational structure the

bank has created the basis for tapping additional revenue sources, restricting costs and achieving the targeted expansion in the next few years.

D. SWOT Analysis of the Deutsche Bank

1. Strengths

Deutsche Bank is the only one of the banks with a global investment banking franchise, and Deutsche is the bank developing the most credible retail

distribution platform. The bank is ranked no. 1 in Sales & Trading worldwide and no. 3 in Corporate Customer / Investment Banking business worldwide.

The Deutsche Bank Corporate and Investment Bank (CIB) division’s research

capability is widely recognized as being at the forefront of the industry, in both Equities and Global Markets.

The Global Equities Research has 682 analysts covering over 2745 stocks. The

activity across the Global Equity Markets is underpinned by some of the most highly regarded research in the industry. With economists and analysts in every

major financial center as well as in many of the dynamic emerging economies


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of the world, this research teams are able to combine local knowledge with a

global perspective to generate topical, targeted research. The research teams worldwide have won plaudits in many different industries and geographical

regions. In the US, the quality of the research teams in technology and telecommunications equipment was recognized as the 2nd best teams by the

1997 Institutional Investor poll. Institutional Investors surveyed by II also rewarded Dr. Ed Yardeni, our Chief US Economist, with a #2 ranking. The

Equity Research Department is currently comprised of analysts providing both economic analysis and coverage of 200 plus companies.

The Global Market Research aims to give its clients strategic advice of the

highest quality based on anticipating key market developments. Working closely with the macroeconomists in Deutsche Bank Research, the teams have

100 ana lysts in 17 locations from Toronto to Tokyo and Sydney to Singapore. The local expertise is believed to be essential and can be synthesized to identify

global themes.

The Deutsche Bank Research analyses economic and political trends in major industrialized countries and the emerging markets of Asia, Latin America and

Eastern Europe of relevance to the international financial markets.

2. Weakness Through the costs:income ratio, Deutsche Bank’s cost management is weak.

The costs:income before bonus for the four quarters in year 2000 are 46%, 63%, 61% and 62% respectively. As mention earlier, European investment banks

have historically seemed incapable of controlling costs and Deutsche Bank is not an exception. In view of this, the realigned organization structure created a

position of COO to focus on aggressive cost management.

In relation to other European and particularly German commercial banks, Deutsche Bank has come a long way in reducing the proportion of its balance

sheet taken up by lending. Howeve r, by comparison with the US bulge bracket investment banks, and even relative to UBS and Credit Suisse, Deutsche Bank

still has heavy credit exposure.

3. Opportunities Deutsche Bank notes that clients want securities custody, clearing processing

and lending services bundled with execution. Trends towards electronic


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execution are requiring high volume, efficient transaction processing of low

ticket items, which is more of a specialty of commercial banks than of investment banks.

Deutsche Bank is trying to get its investment and commercial bankers to work

more closely together through recent realignment. The bank wants to parlay its lending relationships with corporate clients into opportunities to offer advice on

mergers and to underwrite stock and bond sales.

4. Threats Almost 60 percent of pretax profit of Deutsche Bank come from investment

banking business. The investment banking business is a highly volatile area which put the bank into a risky position.

Deutsche Bank is still reeling from the loss of its American executive Edson

Mitchell. Mitchell died when his private jet crashed into a mountain in Maine. As head of global debt for five years, Mitchell had helped manage Deutsche’s

efforts to transform itself from a large German commercial bank into a diversified global financial power. He had played a key role in Deutsche Bank.

The Fed rates cuts in 1Q would stimulate financial markets allowing a stronger

second half to balance a potentially weaker first half now seems less likely. In addition, the financial markets concern has spread from pure capital markets

activities (investment banking) to the wealth management operations, and as seen in these numbers, the impact on that division has been severe.


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VI. Conclusion

Europe is classified as “overbanked” especially in Central Europe. The banking

industry in both Switzerland and Germany not only face severe competition but also decrease in profit margin. As bank products and services are easily copied, the banks

find it difficult to sustain their compe titive advantages. Yet, in view of the keen competition, two of the banks that we paid visit, viz. the CSFB and DB, response

quickly for survival.

We observed that both banks present similar strategic moves to achieve critical mass of client base and expand the market share not only in their domestic market but also

markets in overseas. In doing so, the banks actively practice universal banking to lock up clients by offering full range of banking services. While CSFB still pumping money

into the development of the investment banking and using technology to support its services, Deutsche Bank is more focusing on personal banking services, which targets

at corporate, asset management and private clients.

To differentiate one bank from another in the industry, we found that development in information and network technologies is definitely a way to assist banks to overcome

border constraint and to streamline business processes for a better cost -control. Nevertheless, with the cost reduction, excellence of customer service, and

implementation of new technologies, banks are expected to be able to stay in the competition. In addition, some key success factors unique to investment banking such

as management of funds, recruitment and retaining staff, flexibility in distribution channel and risk control seems to be the critical turning points for future success.


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References

1. “Global Investor 2/2001 – Focus on Asia”, Credit Suisse Private Banking

2. “Wealth Management 1/2001 – Focus on Alternative Investments”, Credit

Suisse Private Banking

3. “Global Strategy 2/2001 – Focus on Asia”, Credit Suisse Private Banking

4. “World Watch 1/2001 – Risk from technology sector continue”, Credit Suisse

Private Banking

5. Peter R. Schmid (2001) “Credit Suisse Group” – presentation on 18 May 2001

6. Dr. Wolfgang Schnorr (2001) “Deutsche Bank - Presentation to University of

Lausanne on 23 May 2001”

7. “Economics – internet revolution and new economy”, (May 18, 2001 issue)

Deutsche Bank Research

8. “Deutsche Bank at a Glance – Facts and figures”, Deutsche Bank

9. Results 2000 Annual Report, Deutsche Bank

10. HSBC Research 2000 issue

11. Merrill Lynch Research 2001 Feb issue

12. US Department of State FY 2001 Country Commercial Guide

13. Internet: www.deutsche-bank.com, www.csfb.com, www.hsbc.com.hk,

http://www.corporateinformation.com/desector/Financial.html

european investment banking analysis

Documents

international field trip

swiss companies operating

european universal banks

investment banking business

credit suisse group

european investment banks

asset management

private clients group