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Deutsche Bank Plan Fails to Convince Analysts as Shares Drop

Here's What Analysts Are Saying About Deutsche Bank's Overhaul

(Bloomberg) -- Deutsche Bank AG shares erased earlier gains of as much as 4.4% and fell 5.7% as of 3 p.m. CET after the German lender unveiled plans to restructure its business. Some analysts said challenges for the bank remain and noted the new profitability targets may be too ambitious.

“We would be selling into any strength as its strategy has significant execution risk and leaves it with little room for error on capital,” Berenberg analyst Eoin Mullany wrote in a note today. The restructure “does not change the fact that DBK is exposed to an industry in structural decline (investment banking) and one in which the marginal pricing is to be break-even (German retail).”

The overhaul, announced Sunday, includes the downsizing of the investment bank, the elimination of 18,000 jobs, the creation of a bad bank and changes to its management team. The bank is also canceling the dividend for this year and next. Delivery of the plan will be key and some questions still remain, analysts said.

Deutsche Bank Plan Fails to Convince Analysts as Shares Drop

Shares had rallied ahead of the much-anticipated restructuring announcement, gaining more than 20% since their record low last month. The stock is still down about 30% over the past 12 months.

Here’s what analysts are saying about Deutsche Bank’s plans:

KBW, Thomas Hallett (underperform)

  • Self-funded overturn plan is positive and will support shares, but profitability remains questionable
  • Key challenge of the plan is the “execution and balancing against the asset value discounts and loss of earnings”
  • Profitability targets appear unrealistic

Morgan Stanley, Magdalena Stoklosa (underweight)

  • Stock could “bounce” in short term but potential re-rating will depend on details on execution
  • Says the new targets seem ambitious
  • Notes some concerns on capital and rating in the short term as the bank will be run at “the lowest headroom bar” among large European banks

BofAML, Andrew Stimpson, Alastair Ryan (underperform)

  • Ambitious plan, with larger cost cuts, higher targeted ROTE than expected
  • Capital to remain in focus, leaves strategy in the hands of the regulators as it’s not clear at which level the bank will be forced to raise capital or take other actions to improve capital
  • Revenue also remains a key element and analysts note that they struggle to see how Deutsche Bank will advance without higher rates, which seems unlikely for now

Goldman Sachs, Jernej Omahen (neutral)

  • Scope and scale of announcements surprised as it shows a very deep restructuring
  • Size of new run-off unit at 74 billion euros of risk-weighed assets is meaningfully bigger than expected
  • Costs of restructuring of 7.4 billion euros will be higher than estimated
  • New profitability targets of achieving an 8% return on tangible equity in 2022 is below estimate of the bank’s cost of equity, low vs peers and ambitious for the bank
  • Some structural challenges at the bank remain such as the absence of a high-return platform, high funding costs and uncertainty around the scope of its investment bank

RBC, Anke Reingen (underperform)

  • The overhaul is more radical than expected, may support shares in the short term
  • Profitability will remain low in the near term and there is little visibility on its ability to improve returns
  • There is a risk the bank will have to increase capital; “it is surprising that regulators allow DBK to run with a minimum CET 1 ratio of 12.5%”

Citi, Andrew Coombs, Nicholas Herman

  • Restructuring charges of 7.4 billion euros are heavier than anticipated, spread out over four years
  • Targets may prove optimistic

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--With assistance from Hanna Hoikkala, Sam Unsted, William Canny, Lisa Pham and James Cone.

To contact the reporter on this story: Macarena Munoz in Madrid at mmunoz39@bloomberg.net

To contact the editor responsible for this story: Beth Mellor at bmellor@bloomberg.net

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