Deutsche Bank’s CEO Is Running Out of Options

(Bloomberg) -- Christian Sewing’s options for turning around Deutsche Bank AG are shrinking.

After an eighth straight quarter of declining revenue, reaction from investors and analysts suggested that the cost cutting at the heart of the chief executive’s strategy won’t be enough to keep markets at bay.

“I can hardly see a future for Deutsche Bank as long as there’s no radical change of strategy," said Dieter Hein, an analyst at Alphavalue/Fairesearch near Frankfurt who recommends investors sell their shares. “It’s hard to see how they’re going to raise revenue and cost cuts are going too slowly.”

Deutsche Bank’s CEO Is Running Out of Options

Even Sewing’s top lieutenants are worried that time isn’t on their side. Unless results in the first three months of 2019 show the turnaround is talking hold, they may be unable to avoid a government-brokered merger with Commerzbank AG, Bloomberg News reported Thursday. While ensuring continued German control of its biggest lenders, benefits to investors are less apparent.

Merger Talk

“Merging with Commerzbank would be foolish," Hein said. “Both banks are still trying to become profitable and I’m frankly afraid of what risks a combination would bring for German taxpayers.”

Taxpayers are already -- at least partially -- footing the bill to fix German lender Nord LB, which is being bailed out by public-sector savings banks and the state of Lower Saxony in a plan that may cost about $4.2 billion. Cerberus Capital Management and Centerbridge Partners had bid for a stake in the struggling lender.

Billionaire Stephen Feinberg’s Cerberus Capital Management, which also owns large stakes in both Deutsche Bank and Commerzbank, wouldn’t stand in the way of a deal, people familiar with the matter have said. Qatar, already a large Deutsche Bank shareholder through two investment vehicles, has committed to increase its stake through the country’s sovereign wealth fund, Bloomberg reported this week.

Different Views

There’s different views from regulators and the government on the best way forward. While the German government is pushing for a domestic solution, local regulator BaFin suggests a preference for a European deal because the two domestic banks are currently too weak to benefit sufficiently from a combination, people familiar with the matter said. The European Central Bank favors a cross-border combination to drive integration in the region’s financial markets, Bloomberg reported Jan. 16, citing people familiar with the matter.

Deutsche Bank executives in September ran through various merger scenarios and concluded that a tie-up with Swiss competitor UBS Group AG was the most favorable option among potential European partners though they decided then the time wasn’t right. As the urgency to seek a radical solution has increased, Deutsche Bank is more willing to explore the avenue of cross-border mergers now, according to a person familiar with the matter.

Any cross-border merger would still be problematic because of Deutsche Bank’s low share price, likely putting it at a disadvantage in any tie up while opening the door to a scenario where it is headquartered outside Germany. Financial supervisors would likely require the bank to be headquartered in either one of Europe’s two largest economies, Germany or France, another person said.

Results last quarter reflected the impact of market gyrations and images of police raiding the bank’s headquarters in November. They highlighted the struggles for Sewing & Co. that left him vowing a return to “controlled” growth, a promise that eluded his predecessor. He said if revenue keeps disappointing, he’ll find ways to boost savings.

Cost Goals

“Management has delivered on costs and Deutsche Bank has returned to profit," Citigroup analysts led by Andrew Coombs wrote in a note, referring to the annual result. "However until the top-line can be stabilized we still see a risk of further consensus earnings downgrades. In the long-term we can also not rule out more dramatic restructuring and another potential dilutive rights issue."

Investors have been down that road before. Deutsche Bank has sold billions of euros in new shares in recent years, one reason that stock has lost three-quarters of its value the past five years.

Chief Financial Officer James von Moltke put on a brave face, saying “we feel we are in control of our destiny.” Still, “there’s a lot of talk in the sector overall, that over time mergers, consolidation in the European banking sector would be sensible for a variety of reasons. We’ve tended to agree with that,” he said in a Bloomberg TV interview.

Deutsche Bank fell 3.4 percent at 12:23 p.m. in Frankfurt trading.

Sewing delivered on a pledge to post the first annual profit in four years, with Deutsche Bank reporting net income after minority interests of 267 million euros for 2018, despite a bigger-than-expected loss in the final three months. The bank also achieved a target of keeping costs, adjusted for one-time items, to below 23 billion euros.

“If the revenue environment does not develop as we expect, we will seek additional savings,” Sewing said. “Beyond 2019, we are still committed to further reducing our costs and improving our cost-income ratio.”

But the key securities unit kept losing market share, particularly in fixed income trading, where revenue slumped 23 percent, but also in equities, which declined 0.8 percent. The lender’s U.S. peers on average reported a 17 percent drop in fixed-income trading and 4 percent higher equities revenue, according to Bloomberg Intelligence.

Von Moltke said that the raid “absolutely impacted” business in December. A group of about 170 law-enforcement officials searched the bank’s headquarters and other offices in late November, in a case tied to the Panama Papers, fueling market concern about potential legal fines. Sewing said at the time that the bank had considered the case closed, having examined it in 2016, when news about the Panama Papers first broke.

“Clearly being in the headlines in that way is unhelpful for client confidence,” von Moltke said. “We’ve gone some way to restoring that. There’s more work to do to communicate the nature of these issues.”

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