Deutsche Bank’s Reboot Looks Real This Time
(Bloomberg Opinion) -- Deutsche Bank AG has given up waiting. After years spent adrift hoping that its ambitions to compete with Wall Street would come good again, Germany’s biggest bank has sounded the retreat.
Chief Executive Officer Christian Sewing’s overhaul may not be particularly imaginative – but it is what the lender needs if it is to do more than just survive. After five restructurings in four years, the depth of his cuts mark the latest plan out as a real attempt to change course. He deserves a fair hearing.
If they can stand the painful initial costs of the restructuring and all goes well, investors should eventually be rewarded with buybacks and dividends. But the destruction of shareholder value to date has been so grave, they are unlikely to give this reboot a second chance. Sewing needs to provide details about how he will cut costs and deliver the most elusive thing of all: Revenue growth.
On Sunday, Deutsche Bank announced it will shrink its trading activities by 40% through an unprecedented withdrawal from equities – a loss-making business in a market where it lags peers. In fixed-income, the rates operation will also be scaled back. About 18,000 jobs, almost 20% of the workforce, will go.
Sewing is jettisoning what Deutsche Bank was never very good at and pivoting away from hedge-fund clients to focus on corporate customers. In time, earnings should be less volatile and more evenly spread between the commercial lending, trading, asset management and private banking operations.
The revamp is starting with some of the most senior executives. Three board members will leave and, symbolically, some of the investment bank’s old guard are also departing, including Garth Ritchie, who led the unit.
Deutsche Bank has to convey both internally and externally that, this time, change means change. Accepting this hasn’t been easy. It involves the humility of giving up on a two-decade effort to be the Goldman Sachs Group Inc. of Europe – a course that was marked by its acquisition of Bankers Trust Corp. in 1999.
Since the financial crisis, though, Deutsche Bank has been hobbled by higher regulatory costs, record-low interest rates, and more than $18 billion of fines. Complex transactions soaked up more expensive capital, while the business of trading bonds – the firm’s engine during the boom – shriveled. The result: ever dwindling revenue and profitability.
Crucial to the success of Sewing’s plan will be his ambitious attempt to shrink the firm’s balance sheet. Non-core assets will be moved to a bad bank. About 288 billion euros ($323 billion) of the so-called leverage exposure associated with these assets should be wound down in three years. That should help to improve the leverage ratio to 5%, from 3.9% at the end of March, and enable the firm to return capital to shareholders.
Some of those assets will be acquired by France’s BNP Paribas SA, which is taking over some of Deutsche Bank’s equities operations – but the rest will be run off or sold. That will leave the German bank vulnerable it if fails to get the prices it hopes for them. More details – which weren’t immediately available – will be essential to understanding how easy this will be to pull off.
Sewing is also attacking Deutsche Bank’s stubbornly high cost base. Adjusted costs (which exclude, among other things, litigation and restructuring charges) are slated to drop by a quarter by 2022. Again, how he plans to achieve this remains sketchy.
One thing that may cheer investors is something that was entirely missing from the plan: a request for more money. Deutsche Bank has tapped shareholders for 30 billion euros over the past decade. That said, they will have to forfeit dividends this year and next to help fund the 7.4 billion-euro revamp.
So what took Sewing so long? It’s clear the aborted merger with cross-town rival Commerzbank AG earlier this year was an unhelpful distraction. Key, too, though has been gaining approval from regulators to lower the capital ratio to help fund the reorganization, shielding shareholders from a bigger hit.
But he really couldn’t have waited longer. The outlook for revenue is deteriorating and some clients appear to be getting jittery. On Friday, Bloomberg News reported that hedge fund Renaissance Technologies had been withdrawing money in recent months.
Sewing’s plan is ambitious and faces big pitfalls. No bank has exited the equities business on this scale before, and it’s unclear what effect it may have on, for example, private banking customers. Equally, the retreat in rates may hurt the remaining transaction banking operation: Clients may choose to take more of their business away. Investors will want to get a better understanding for how he intends to grow revenue at the remaining businesses by about 2% a year through 2022.
If it all works, the firm should have 5 billion euros of capital to return to investors from 2022. That should underpin a stock price that values the bank at just a quarter of the book value of its assets. And once Deutsche Bank makes some strides in treating its gangrene, its competitors might also be more tempted to team up.
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Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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