Deutsche Bank shrinks and restructures

“THE MOST fundamental transformation of Deutsche Bank in decades.” So Christian Sewing, the chief executive, described his plan, unveiled on July 7th, to revive the chronically ailing German lender. Deutsche is pruning its investment bank hard, quitting the trading of shares altogether and paring back its bond-trading operations. Costs will be cut by €6bn ($6.7bn) a year, a quarter of the total, by 2022. Eighteen thousand jobs, or a fifth of the payroll, will go. Some equity traders have already been told to clear their desks.

Mr Sewing’s plan has taken five months to hatch (during which time Deutsche also weighed up and dismissed a merger with its neighbour, Commerzbank). It looks bold. Yet it is also a belated recognition of reality. For years after the financial crisis of a decade ago, Deutsche clung to the hope that it would again go toe-to-toe with Wall Street’s giants in all areas of investment banking, as it had before the crash. “We kept too many options open,” Mr Sewing told journalists on July 8th. It has at last abandoned the last vestiges of that ambition.

Mr Sewing is reshaping the bank around four lines. The centrepiece will be a corporate bank, providing businesses in Germany, Europe and elsewhere with cash management, trade finance, foreign exchange and so forth: dull-sounding work but steady. An investment bank will remain, but geared far more to the needs of corporate clients, by raising finance through issuing shares and bonds, and advising on mergers. Deutsche also owns Germany’s biggest retail bank, combining an eponymous posh brand and the dowdier Postbank, and almost 80% of the country’s biggest asset manager, DWS. It is putting the €74bn of risk-weighted assets it is shedding into a separate “capital-release unit” (Mr Sewing balks at the term “bad bank”, but he may be stuck with it).

At first, this will cost Deutsche money: €7.4bn in all, €5.1bn of it this year, which will mean a fourth annual loss in five years. (Last year Deutsche eked out a paltry profit.) But Mr Sewing intends to raise no new equity from shareholders, although they will receive no dividends this year or next. By 2022 he expects the bank to be a lot healthier, returning 8% on tangible equity and starting to pay out up to €5bn to shareholders.

Even then Deutsche will be nothing to write home about: 8% is the bare minimum that shareholders expect. According to a recent survey by the European Banking Authority, a supervisor, four-fifths of European banks estimate their cost of equity to be over that mark. And even after Mr Sewing’s surgery, costs are expected to soak up 70% of revenues. The best banks manage 50% or less.

Moreover, European banking looks likely to remain far from lucrative for some time to come. Interest rates are rock bottom and growth is slow. Two-fifths of banks earn less than their cost of equity. Deutsche’s domestic market is also fiercely competitive: an army of public-sector and co-operative banks tussle for the custom of German savers and companies. The trouble for Deutsche is that Mr Sewing’s target may be both unimpressive and unachievable.

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