Deutsche Bank CEO Warns of Rising Pressure to Consolidate

(Bloomberg) -- Deutsche Bank AG Chief Executive Officer Christian Sewing has a stark message for the thousands of banks spread out across the European Union: bulk up or die.

“The pressure to consolidate will rise significantly,” Sewing said in a speech at a conference in Frankfurt on Wednesday. An increase in regulatory requirements, in addition to an already-pressing need for investment in information technology, will “overwhelm” many banks, he said.

A decade after the financial crisis, record-low interest rates are capping revenues for the region’s lenders, while legal bills and capital demands have eroded profits. At the same time, rapid technological change has eroded once-stable customer bases and forced banks to adapt their services to a marketplace increasingly dominated by the internet.

“There are 5,500 financial institutions in the euro area,” Sewing said. “But how many of them can really manage risks in a world economy where’s it’s increasingly hard to get an overview? How many are fit for a platform-economy, in which advantages of scale will count for more than ever?”

Against that backdrop, there has been speculation that Deutsche Bank itself may ultimately seek a tie-up with cross-town rival Commerzbank AG. Sewing didn’t address that speculation directly, and repeated that more harmonization of European regulation is necessary for genuine European banking champions to emerge.

Global Ambition

But Sewing reaffirmed his global ambition for Deutsche Bank, even as it withdraws from certain investment banking operations in the U.S. and other countries.

“We stand by our corporate and investment bank even though we have recently reassessed our set-up thoroughly,” Sewing said. “Our global ambition won’t be up for debate under my leadership.”

Sewing announced widespread cuts to the investment banking division within weeks of taking over as chief executive in April. The lender will pull back from unprofitable areas and shift the focus to providing services with a link to Europe.

The lender cut 1,700 jobs in the second quarter, many of them front-office positions at the investment bank. It also slashed 80 billion euros ($93 billion) of leverage exposure from its prime finance and U.S. rates business.

Answering questions after his speech, Sewing said the bank’s share price will turn around within a year, if he can push through his cuts without losing revenue. According to data compiled by Bloomberg, analysts expect revenue to fall again in the third quarter, and for 2018 as a whole, before bottoming out in 2019.

“We have to keep the top line resilient,” Sewing said. “If we continue to show this for the next two or three quarters, then it will come to a revaluation” of the company.

Growth Concerns

The bank’s shares had fallen 37 percent so far this year as of Tuesday’s close, amid concerns about the shrinking investment bank franchise and overcapacity in Germany that depresses its retail bank’s profitability. By 11.05 a.m. in Frankfurt, they were up 0.3 percent at 9.89 euros.

Deutsche Bank’s ability to at least keep its revenue steady depends partly of the strength of the global economy. In contrast to the optimism that has driven U.S. stocks to new record highs this week, Sewing said global growth has probably peaked for the current economic cycle, and warned that the recent turmoil in Turkey “raised questions about the stability of other emerging markets.”

“In times when economic policy is becoming more nationalist, the world is much more vulnerable to shocks,” Sewing said, without singling out any specific country’s policy. “Politicians need to be careful that they don’t sacrifice the stability of the world economy to national interests.”

©2018 Bloomberg L.P.