Wielding the Scalpel at Deutsche Bank

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(Bloomberg Gadfly) -- Nobody expects Deutsche Bank AG to set the world alight when it reports first-quarter results on Thursday -- the lender has already warned that profit will be hit by adverse currency movements and higher funding costs. But it's a perfect time for new CEO Christian Sewing to front-load the bad news and announce some bold decisions.

That means taking the scalpel to a bank that's over-extended and over-staffed relative to its earnings power -- which, for three years running, has been nil. The U.S. cash equities business is one division ripe for the chop, according to Bloomberg News. The buying and selling of stocks, which has become a low-margin, high-technology business in recent decades, is unlikely to be an area where Deutsche can profitably compete against Wall Street. Why keep it in its current form?

Such a move should be only a start given the scale of the bank's problems. Cutbacks by themselves won't create revenue, reduce management complexity or stop talented people leaving. But it would be a good place to start.

Firstly, it would show Sewing is serious about reducing the scale of Deutsche Bank's operations.

Chopping or shuttering U.S. cash equities is something that's easy to propose -- Deutsche currently languishes between seventh and ninth place in the rankings for this business -- but hard to achieve. An official retreat would signal to clients that you are no longer a full-service bank. When pitching for an IPO or stock offering, having a cash equities business to trade the shares is an obvious plus. Like picking at a ball of string, cutting back from one area can unnerve plenty of clients and staff. It's not done lightly, even if it makes sense.

Secondly, it would show Sewing is willing to put profit before revenue (and ego) by choosing to compete in businesses where Deutsche can actually make money.

Cryan was making advances here -- though too slowly for the board's liking. He had started an internal business review that Sewing will ultimately inherit. Despite having the seventh-biggest headcount and the fourth-biggest balance sheet among big European banks, Deutsche Bank has the worst cost-to-income ratio and is one of the least profitable, according to Bloomberg data. Something has to give. The U.S. market, where the domestic banks have a home advantage, is probably it.

Thirdly, it would please Deutsche Bank's bigger stakeholders -- Angela Merkel and Mario Draghi -- by re-balancing the lender's business further towards Europe.

Deutsche Bank's size and systemic importance have made its fragility a national and regional headache. It recent existential crises have shown how important it is to keep politicians, regulators and taxpayers on side. Tilting the business to Germany and Europe will help if ever the state has to help Deutsche Bank, or if regulators need convincing that a merger with Commerzbank AG is needed.

There are no easy fixes to Deutsche Bank -- and no easy wins for Sewing. But if unpopular moves need to be made, now is the moment.

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

©2018 Bloomberg L.P.

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