Deutsche Bank and Commerzbank Are Stuck in a Mire
(Bloomberg Opinion) -- In 2019, Deutsche Bank AG and Commerzbank AG explored (and abandoned) plans to fix their broken models by merging. Since then, they have been making some progress on their own and up against the pandemic.
After five years in the red, Deutsche finally returned to a meager profit, while Commerzbank, the smaller rival, is at last embarking on a much-needed restructuring that should stem losses. But neither bank can yet count on sustainable profitability, and it’s still far from clear that either will be able to escape an eventual tie-up with the other, or a rival.
Christian Sewing, Deutsche’s chief executive officer, is sounding triumphant. Presenting from a slick TV studio at the bank’s headquarters on Thursday, he spoke confidently about how it had proved critics wrong. It’s true that the lender has weathered the pandemic better than many of its peers. Deutsche has set aside far less for troubled loans — though some analysts are skeptical those provisions will be sufficient — and oodles of central bank liquidity has led to a surge in trading activity that’s bolstered its fixed-income business.
The trouble is, Deutsche was supposed to be weaning itself off the volatile earnings from trading and slowly growing its commercial lending businesses. But relentless competition in Germany and lower interest rates are squeezing margins, forcing the bank to scrap growth targets for private and commercial lending and rely on the investment unit.
The CEO reiterated that 8.5 billion euros ($10.2 billion) of investment banking revenue in 2022 is within reach. Although that’s lower than the 9.3 billion euros earned in what was an exceptional 2020, it’s still a jump of more than 20% from 2019. This, of course, would depend on Deutsche being able to retain the market share it gained last year. Yet it’s a stretch to predict how 2021 will land, let alone make a prediction for the year after.
Meanwhile, cutting costs is also becoming tougher. After 12 consecutive quarters of year-on-year reductions in quarterly adjusted costs (excluding the transformation expenses), the bank said it isn’t expecting cost reductions to follow the same path in 2021 as its investments in technology will increase. It’s still on a “good path” to lower costs to 16.7 billion euros by 2022 from 19.5 billion euros in 2020, but the challenge will be keeping up with Wall Street competition to drive growth. JPMorgan Chase & Co. this year is increasing investment spending by almost one quarter.
In short, Deutsche’s profitability target — a return on tangible equity (ROTE) of 8% in 2022 — cannot be counted on. Analysts estimate it will be less than 4%.
The outlook is equally uncertain at Commerzbank after another loss in 2020. The new CEO, Manfred Knof, who joined from Deutsche last year, is embarking on cutting 10,000 jobs. He plans on closing more than 40% of branches, with the objective of reducing costs by 20% by 2024. Excluding the mBank Polish unit, he’s not counting on revenue growth.
The bank plans to further trim investment banking activities, including considering tie-ups for equity trading and research (Deutsche exited equity trading in 2019). It’s also going to be more selective in the corporate clients it serves. Yet getting all this done, and maintaining revenue to get to a 7% ROTE target in 2024, is looking quite ambitious.
It’s not a surprise that Deutsche and Commerzbank are still among Europe’s cheapest big lenders. Commerzbank shares value the lender at 28% of its tangible book value, while Deutsche is at 38% of book value. As demands for technology investments intensify and Germany’s banking sector continues to be crowded, a deal with a competitor may prove irresistible for the two lenders.
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Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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