Deutsche Bank Investor Doubts Increase Over Sewing's Revamp
Deutsche Bank Extends Declines on Skepticism Over Restructuring
(Bloomberg) --
Investors are becoming increasingly skeptical that Christian Sewing can pull off the biggest overhaul in Deutsche Bank AG’s recent history.
What many are certain about: it’s still not the time to own its shares. The stock, which already had the lowest price-to-book ratio of any big European bank, has plunged almost 10% this week and 15% from its Monday peak.
Initial optimism surrounding Chief Executive Officer Christian Sewing’s sweeping revamp has quickly given way to doubts over whether the German lender can reach its profit goals in a competitive home market. The bank has consistently disappointed shareholders in recent years, and after the overhaul will be focused on servicing companies’ routine financing needs while also withholding dividends for this year and next.
The vast restructuring -- which will see 18,000 job losses -- is forecast to cost 7.4 billion euros ($8.3 billion) and will shrink the bank’s capital buffers.
“Execution risk seems higher than we initially expected given more headwinds to capital,” Anke Reingen, an analyst at RBC Capital Markets, wrote in a note to clients. Deutsche Bank’s plan “appears to leave little room for error.”
‘Highly Improbable’
Deutsche Bank reaching its 2022 profitability goal is “highly improbable,” given that the lender will probably lose revenue in the process, according to Citigroup Inc. analysts. The company is completely exiting some businesses, such as equities trading, and has said the retrenchment could also lead to the loss of revenue in other businesses it wants to keep.
Metric | 2019 | 2020 | 2022 |
| Revenue | About €25b | ||
| Adjusted Costs | €21.5b | €19.5b | €17b |
| Jobs | Cut by 18k to 74k | ||
| Cost to Income Ratio | 70% | ||
| Pretax Profit | €6b Plus | ||
| Return on Tangible Equity | 8% | ||
| Common Equity Tier 1 Ratio | At Least 12.5% | At Least 12.5% | At Least 12.5% |
| Leverage Ratio | 4% | 4.5% | 5% |
| Share Buybacks & Dividends | €5b Starting in 2022 | ||
Deutsche Bank is creating what it’s calling a “capital-release unit” to handle the wind-down of non-strategic assets so it can focus on its main businesses. The holdings and related businesses being moved to the unit represented 74 billion euros of risk-weighted assets and 288 billion euros of leverage exposure at the end of last year.
The shares fell as much as 6.5% on Tuesday and were trading 4% lower at 6.52 euros as of 4:49 p.m. in Frankfurt. The stock has declined about 6.5% this year.
Much of the short-term outlook for the bank is also unclear. While Deutsche Bank expects to post a loss this year because of the overhaul charges, “we’re working toward being break-even or better in 2020,” said Chief Financial Officer James von Moltke.
“Obviously there’s a significant amount of uncertainty in that forecast as we go through the restructuring, whether it’s the timing of restructuring or other things,” he told reporters on a conference call on Monday.
Credit investors are concerned about the fallout from a lower capital buffer even though Deutsche Bank said that it would be in a position to pay coupons on its debt throughout the restructuring. The bank’s riskiest bonds, known as additional tier 1 notes, dropped 3 cents on the euro to 85 cents, the lowest in more than a month, according to data compiled by Bloomberg. The price of credit-default swaps insuring Deutsche Bank’s debt against losses rose for a second day, indicating deteriorating perceptions of credit quality.
Deutsche Bank coordinated its plans with regulators and bases its targets on conservative assumptions, Sewing said in London on Monday.
Different Now
“Some may say you have heard this before, or at least parts of it,” he told reporters on a conference call. “It is different this time, we are different. We are not going to shareholders to share the burden, we are going to manage this transformation organically. We are not denying or turning a blind eye to our weaknesses.”
The CEO also signaled that he’s going to link his personal wealth even closer to the fortunes of the bank he’s overhauling on Monday, telling analysts “I want to lead by example. I am personally putting my money where my mouth is,” without giving more details of his planned investment.
To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net;Katie Linsell in London at klinsell@bloomberg.net
To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen
©2019 Bloomberg L.P.