For Deutsche’s i-bank to succeed, rivals must fail

he author is a Reuters Breakingviews columnist. The opinions expressed are her own.

LONDON — Anshu Jain has an answer for investors worried about how investment banks generate decent returns while holding more capital. Deutsche Bank’s investment banking chief reckons the division can deliver a pre-tax return on equity of 20 percent to 25 percent even after tough new rules are introduced in 2013. But the plan depends on Deutsche winning market share in areas like equities and commodities. And its rivals have similar ambitions.

Last year, Deutsche’s investment bank earned a respectable 28 percent ROE, before tax. But factor in the effects of impending new regulations and capital requirements, and that figure would have shrivelled to just 10 percent to 12 percent. In order to get back above 20 percent, Deutsche will have to take several steps.

First, the investment bank must shrink its risk-weighted assets, thereby limiting the amount of extra capital that the unit is required to hold. Jain reckons this process, which appears to be on track, will add between 5 and 6 percentage points to ROE.