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Deutsche Bank just launched its last, best chance to save itself

Posted at 10:43 AM, Jul 08, 2019
and last updated 2019-07-09 04:41:22-04

Deutsche Bank’s $8.3 billion transformation comes with a promise: This time will be different. But not everyone is so sure.

The German lender insists that its latest turnaround effort, which eliminates 18,000 jobs and dramatically shrinks its investment bank, will put the company on the path to consistent profits.

“We are doing nothing short of reinventing Deutsche Bank,” CEO Christian Sewing said Monday.

Instead of cutting back weaker divisions, Deutsche Bank said it will close some of them entirely. Management is promising “no compromises” and “relentless execution discipline.”

But investors and analysts are skeptical that the bank can hit its new revenue targets amid a costly overhaul. Shares fell more than 5% Monday in a stinging vote of no-confidence, and were trading another 4% lower on Tuesday.

“The extent of the restructuring indicates an acceptance and willingness for change,” Thomas Hallett, an analyst at Keefe, Bruyette & Woods, said in a note. “The key challenge is execution.”

Spread ‘too thin’

Two decades ago, Deutsche Bank dreamed of competing with Goldman Sachs and Morgan Stanley in classic Wall Street business lines like investment banking.

But the bank has struggled over the past decade. A sluggish European economy, post-financial crisis fines, costly new regulations and a reluctance to change all hurt its competitiveness. The market value of JPMorgan Chase, at one time considered a potential takeover target for Deutsche Bank, is now more than 20 times that of the German lender.

“We tried to compete in nearly every corner of the banking market at the same time,” said Sewing. “We simply spread ourselves too thin.”

The company will now try to return to its roots with its seventh major restructuring attempt since the financial crisis.

Deutsche Bank is shuttering its equities sales and trading business, while trimming its rates division. It will also create a “bad bank” for €74 billion ($83 billion) in assets that eat up too much capital.

Those assets will be sold over the coming years, freeing up money to invest elsewhere.

The focus will instead be on corporate money management, a less glamorous but more reliable line source of revenue. This will move Deutsche Bank closer to its origins as the go-to financier for Germany’s exporters.

To analysts, the logic behind the restructuring program makes sense. And they praised it for going further than in the past.

“[The] restructuring in our view is bold and for the first time not half-baked,” JPMorgan Chase analysts Kian Abouhossein and Amit Ranjan said in a note Monday.

Risks remain

Even so, there’s some concern that Deutsche Bank’s plan to go all in on corporate money management won’t yield the intended results.

The company fell from fifth to sixth in the global rankings for that business between 2017 and 2018, according to banking research firm Coalition. That’s not the kind of momentum it needs.

The biggest source of anxiety is that Deutsche Bank has little room for error. The time horizon — the bank wants to offload its unwanted assets and increase core revenues by 10% to €25 billion ($28 billion) by 2022 — is making investors nervous.

Deutsche Bank has said that it won’t raise additional capital to fund its restructuring plan.

“Most of the questions today are not around whether they can cut costs,” said Andrew Stimpson, an analyst at Bank of America Merrill Lynch. “It’s about what will happen to revenue in the meantime.”

CFO James von Moltke said Monday that the company wants to at least break even in 2020, but he cautioned that there’s a “significant amount of uncertainty in that forecast.”

If things don’t go according to plan, Deutsche Bank could go from bad to worse.