Just How Deep Will Sewing Cut? Deutsche Bank Owners Want Details

(Bloomberg) -- Christian Sewing was barely two weeks into his role as chief executive officer of Deutsche Bank AG when he unveiled the outlines of a yet another turnaround plan for the German lender in April. Now shareholders say it’s time to flesh out the details.

Four of the bank’s top investors want the CEO to provide specifics on where he wants to scale back the investment bank when he reports second-quarter earnings on Wednesday. Two of those said more radical measures than Sewing has proposed are needed. The investors asked not to be identified in discussing their views.

Just How Deep Will Sewing Cut? Deutsche Bank Owners Want Details

“The crucial question for investors is just how deep of a restructuring Deutsche Bank needs to achieve sustainable profitability,” said Alexandra Annecke, a fund manager at Union Investment, which owns about 0.15 percent in the bank, according to data compiled by Bloomberg.

Sewing’s restructuring plan -- the fourth in three years for Deutsche Bank -- is centered on more job cuts and reductions to the investment bank. Some details have trickled in: At least 7,000 roles will be eliminated, with a focus on the U.S. operations and the global equities business. At the same time, Sewing confirmed his commitment to the investment bank, saying it will always account for at least half of the bank’s revenue.

But what exactly will remain of the securities unit after the cutting is done goes to the core of Deutsche Bank’s woes. For years, the lender has tried to right-size the business without being able to reshape it into a sustainable operation. As a result, revenue has declined faster than costs, eroding profitability further and leaving investors and clients wondering when and how the contraction will stop.

Just How Deep Will Sewing Cut? Deutsche Bank Owners Want Details

“To date, revenue attrition has far outpaced cost reduction,” Citigroup Inc. analysts led by Andrew Coombs wrote in a research note earlier July. “It is tough to see how this trend reverses quickly.”

Preliminary second-quarter results unveiled by Deutsche Bank on July 16 suggested revenue and adjusted costs were both broadly flat compared with a year earlier. Net income of about 400 million euros ($468 million) was well above the 159 million euros analysts had predicted, sending Deutsche Bank shares 7.3 percent higher that day. The stock is still down about 35 percent this year, among the worst of the European banks.

Yet much of the profit surprise seemed to come from one-off items, which did little to quell the questions about the investment bank. Deutsche Bank seems to have continued to lose market share in the second quarter compared with its U.S. rivals in trading securities.

Sewing has announced he will reduce the bank’s dealings with hedge funds, its U.S. rates business, its equities footprint globally, and corporate finance in U.S. and Asia. But various analysts have said that bigger steps are possible, with Citigroup saying in its research note that one “aggressive” alternative scenario would be for Deutsche Bank to leave the U.S. and equities trading altogether. Sewing has repeatedly ruled out a full withdrawal from the U.S.

Just How Deep Will Sewing Cut? Deutsche Bank Owners Want Details

In the longer run, if Sewing can’t cut costs more quickly than the bank loses revenue, a deeper restructuring may become inevitable. The bank has hired a unit of Cerberus Capital Management, Stephen Feinberg’s private equity firm, to advise it on how to reach Sewing’s profit targets.

Cerberus is one of Deutsche Bank’s largest investors and also owns a big stake in Commerzbank AG. A combination of the two lenders has emerged as the preferred medium- to long-term strategic option among Deutsche Bank’s top echelons, Bloomberg reported last month.

For now, analysts say that Sewing’s hands are tied as yet another change of plans would erode staff morale further and could require it to raise capital yet again.

Deutsche Bank “cannot afford a radical strategy change at the moment,” UBS analyst Daniele Brupbacher wrote in a note. “We expect a ‘muddle through’ strategy combined with hope for better revenues.”

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