Deutsche Bank's Best Shot May Not Be Enough
July 08 2019 - 10:07AM
Dow Jones News
By Stephen Wilmot
In theory, Deutsche Bank's strategic reset is as sensible as it
is overdue. In practice, it will require flawless execution and may
not go far enough.
Germany's top lender laid out a radical restructuring plan on
Sunday. It will shutter key elements of the global
investment-banking operation, notably equities trading, and shift
about a fifth of its assets into a new "bad bank" to be wound down.
The basic idea is to shrink back to its historic core: serving the
treasury needs of big companies and German savers.
This addresses one of the reasons for Deutsche Bank's woefully
low profitability: the losses it makes in global investment banking
operations that cannot compete with those of far larger U.S.
rivals. Equities trading is a scale and technology game
increasingly dominated by J.P. Morgan, Morgan Stanley and Goldman
Sachs.
It doesn't address another reason: Retail banking in Germany has
never made much money. Hundreds of savings banks and state-backed
lenders compete against commercial banks like Deutsche for
customers. And the emphasis is on saving rather than borrowing,
leaving banks with excess deposits to invest at the European
Central Bank's negative interest rates.
The problem is illustrated by Deutsche Bank's local rival and
failed merger partner Commerzbank. Commerzbank has already walked
the stony restructuring path Deutsche is now contemplating, yet its
shares still only fetch 0.29 times book value, compared with 0.24
times for Deutsche. Being a focused German lender just isn't an
attractive prospect for investors.
However, there isn't much Deutsche can do about this. It needs
the deposit base provided by its German retail bank to fund a more
lucrative business serving corporate clients.
The new targets announced Sunday leave very little room for
error. Estimated restructuring charges of EUR7.4 billion by the end
of 2022 will cut its core tier-one equity ratio to 12.7%, according
to brokerage Berenberg, from 13.7% at the end of the first quarter.
That is just a fraction above Deutsche Bank's new minimum targeted
ratio of 12.5%.
It is also unclear just how committed Chief Executive Christian
Sewing is to getting out of investment banking. He may be quitting
equities trading, but he is keeping the U.S. leveraged finance
division, which lends money in private-equity deals. Presumably
this is because the business is making good returns, but it is also
at risk of overheating and has little to do with the new strategy.
Credit Suisse has sent similarly mixed messages by keeping U.S.
structured finance even as it tries to refocus on fast-growing
Asian wealth management. Both companies would do better to sell the
units while they can get good prices.
Hidden within Deutsche Bank is a solid business serving big
companies' banking needs. For the industry, revenue from these
clients should grow at four times the rate of revenue from money
managers what during the period through 2021, according to a report
by Morgan Stanley and Oliver Wyman. Deutsche Bank needs to do
everything it can to tap this growth -- free of distractions.
Write to Stephen Wilmot at stephen.wilmot@wsj.com
(END) Dow Jones Newswires
July 08, 2019 09:52 ET (13:52 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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