Deutsche Bank Tries Strategy U-Turn With The Same Driver

(Bloomberg Gadfly) -- Deutsche Bank AG Chief Executive Officer John Cryan did a great job last year convincing shareholders that Germany's No. 1 lender did not need to raise capital. So much so that when Bloomberg News reported on Friday the bank would be looking at a capital hike after all, its stock fell the most in a week.

Now that Deutsche Bank management confirmed on Sunday an 8 billion-euro ($8.5 billion) capital increase as well as a pretty major strategic U-turn -- it will keep, not sell, German retail unit Postbank -- investors would be right to question why the same drivers are behind the wheel.

This is not to say that raising capital and keeping Postbank are bad decisions per se. Gadfly has argued before that a capital hike is the least worst option for Cryan as investor concerns shift from Deutsche Bank's existential future to its ability to grow market share and turn a profit.

Fully offloading divisions like Postbank or the asset management unit -- a tiny slice of which will be put up for sale at some point -- would sacrifice revenue and make the bank less diversified. A successful rights offer should theoretically lift Deutsche Bank's core Tier 1 capital ratio to 14.1 percent, the highest in its European peer group.

But what are shareholders being offered in exchange for 8 billion euros? Right now, mainly the promise of a steeper restructuring bill and a pledge to reduce that bill over time.

Integrating Postbank back into the larger business, bolstering its profit power and cutting jobs will cost Deutsche Bank around 2 billion euros between now and 2021. The bulk of those costs will be booked over the next two years. That's not exactly a comfort considering the bank has posted annual losses for two years straight. Yes, the end-game is for Deutsche to have a return on equity that would meet its cost of capital, about 10 percent, but this is a goal with no deadline. A "competitive" dividend will start being paid from 2018.

The management team that will deliver this new overhaul looks largely the same. Cryan himself downplayed the strategic reversal as a "change of heart" and told journalists on Sunday he wasn't going anywhere.

His two new deputy CEOs are familiar faces: Christian Sewing, who heads wealth management and consumer banking, and Marcus Schenck, group Chief Financial Officer, who will now shift seats to run the newly combined investment bank and markets division. Giving an oversight role to the man who held the company's purse strings looks like a promise to investors that even in an upbeat outlook for interest rates, corporate mergers and trading profits, shrinking the investment bank's cost base will still be a priority.

Cryan has so far been the best man for the job -- and he certainly deserves some kind of award for steering Deutsche through some serious lapses of market confidence last year. He and his team are surely an improvement on the empire-builders of old and they appear committed to prioritizing shareholders over staff. Deutsche Bank last year scrapped top executives' bonuses and slashed variable compensation for other senior employees, which is not an easy decision to make if rivals respond to a return of animal spirits and woo talent away. Deutsche Bank's co-head of investment banking, Jeff Urwin, is the latest departure. 

But management still needs to explain more about what investors are buying into. Right now, there's too much being placed on faith that an upturn in markets will cushion the blow. Deutsche Bank's profit destination looks especially fuzzy. Restructuring and cost-cutting is in the cards for years to come and at the same time Deutsche Bank will have to keep chasing market share to keep up with more aggressive rivals and grow revenue. Shrinking, growing, restructuring. It would be a tough sell for any team, let alone the same one as before.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

To contact the author of this story: Lionel Laurent in London at llaurent2@bloomberg.net.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.