Deutsche Bank Revisits an Old Bind: How to Cut Its Way to Growth

(Bloomberg) -- Deutsche Bank AG is revisiting a familiar path to shore up investor confidence after the breakdown of talks with Commerzbank AG.

Two weeks after deciding a takeover would be too difficult to execute, a plan to find a partner for its asset management business has stalled. Chairman Paul Achleitner signaled he sees no need for a fundamental adjustment of the investment bank, leaving few options to fix the unit at heart of the lender’s woes. And it’s increasingly clear that investors aren’t prepared to give the bank the capital it needs for a deeper overhaul.

As a result, Chief Executive Officer Christian Sewing is on a path that has turned out to be a dead end before: more cuts around the edges of the investment bank, with a bit of window dressing.

This time the CEO is focusing on unprofitable investment banking business lines such as equities trading and parts of the U.S. operations, according to people familiar with the matter. He’s looking to give more visibility to a unit that provides cash management and trade finance to companies, a bright spot in the investment bank. And he’s accelerating planned savings in the retail business, said the people, who asked not to be identified in discussing ongoing deliberations.

Deutsche Bank Revisits an Old Bind: How to Cut Its Way to Growth

A spokesman for Deutsche Bank declined to comment.

Sewing had been working on a Plan B even while exploring a tie-up with Commerzbank, aware that announcing talks with its rival and then breaking them off would only amplify pressure to come up with a new strategy. Since he took over last year after a bitter boardroom battle, Deutsche Bank’s stock has declined about 40%. The lender’s price-to-book ratio, or the market value relative to its equity capital, is by far the lowest among peers.

But grand options to reverse years of declining revenue and sub-par profitability have withered one by one as he prepares to face frustrated investors at the bank’s annual general meeting next week.

As part of the measures now under consideration, Deutsche Bank may make deep cuts within equities, including research and equity derivatives, the people said. Major changes at the wider investment bank, however, could cause costs, for instance from winding down long-dated derivatives, the people familiar with the discussions said. That could present an obstacle if it creates a capital need for the bank, they said, asking not to be identified because the matter is private.

Several large investors as well as regulators have long been asking for a deeper restructuring of the investment bank, in particular the U.S. unit. Some officials at the European Central Bank say Deutsche Bank should withdraw from equities trading altogether to focus on its larger and stronger debt franchise.

Deutsche Bank is also considering giving more visibility to the transaction bank, which is usually overshadowed by the trading units, the people said. The idea is to give investors a better view of a relatively large and growing business to help improve Deutsche Bank’s low valuation, the people said.

The bank also wants to earmark certain areas for growth, for instance in emerging markets, but there are diverging internal views where exactly to allocate more resources and where to scale back, one person said. The bank has reduced risk-taking at its trading units for the better part of a decade, one reason why it suffered from declining revenue.

Deutsche Bank Revisits an Old Bind: How to Cut Its Way to Growth

Outside the investment bank, in the asset management and retail units, Sewing has already accelerated savings to achieve his profitability target. DWS has cut dozens of employees this year in layoffs that included managing directors and the head of the firm’s global research institute. Deutsche Bank had been exploring a merger of the business with the asset management arm of UBS Group AG, but a deal is now seen as increasingly unlikely after disagreements emerged over who would retain majority control, the people said.

At the retail banking division, the decision to break off talks with Commerzbank has earned management goodwill with labor unions, one reason that’s allowing for a quicker implementation of savings, the people said. The unit, led by Frank Strauss, may now reach a goal of shaving 900 million euros off annual costs six to 12 months before of the target date, originally set for the end of 2022, said the people.

But any savings there pale in comparison with the challenge posed by the investment bank, which has struggled to make a profit and caused a plethora of legal issues in the past. The business has been locked in a downward spiral of rising funding costs and declining market share. Past scandals have forced it to sever relationships and invest in better controls.

Deutsche Bank Revisits an Old Bind: How to Cut Its Way to Growth

Many analysts think equities trading in particular needs restructuring given its long history of incurring losses. Deutsche Bank in 2017 hired ex-Goldman Sachs Group Inc. partner Peter Selman out of retirement to turn the business around, but results so far haven’t been encouraging. The unit posted an estimated loss of about $750 million last year, people briefed on the matter have said. That’s one-third of it’s annual revenue.

Sewing has emphasized that the investment bank is “the core DNA” of Deutsche Bank and that he’s committed to its presence in the U.S. and Asia. In a recent newspaper interview, however, he conceded he’ll have to “think of something else” if the division’s performance doesn’t improve. Achleitner said in a separate interview that he didn’t see a need for a “fundamental” shift in the business.

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