Saturday, 24 August 2019

Deutsche revival plan: this time it's different

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This time it’s different. No, really, it is.

So says Deutsche Bank boss Christian Sewing, who has laid out a far-reaching plan to turn around the German bank’s fortunes. Sewing hopes a leaner, more focused and efficient bank will spark a rally in Deutsche’s depressed shares.

After a brief warm welcome, investors have shown limited enthusiasm for the plan, however. Shares are down 4% at below €7 since it was unveiled. That’s a paltry 0.2 times book value - reflecting how far investors believe Deutsche is destroying value.

While there remains concern about the strategy - especially Deutsche’s ability to generate sustainable profits - there is also a big dose of scepticism about Sewing’s ability to execute plans after multiple past mis-steps, investors said.

Sewing took over as chief executive in April 2018. In the six years before he took the helm, Deutsche set 17 new and explicit major financial targets in four strategic reviews. According to an IFR analysis of those targets last year, it missed or was almost certain to miss nine of them. Another three were hard to judge or it was too early to tell. That left just five targets met - or a strike rate of 29%.

“Deutsche has had several restructurings in the last several years and they haven’t executed on those,” said Bjorn Norrman, investment manager in the fixed income team at Kames Capital, which owns Deutsche Bank bonds.

“But what’s different here is the intentions and the targets are more ambitious. The past efforts have been about reconfigurations and repositioning, but it’s clearly different now. There is a more ambitious goal this time around,” Norrman said.

Delivering on targets has improved in Sewing’s 15 months in charge, but he is well aware of the doubters.

“Some may say that you have had this before or at least parts of it,” Sewing told investors and analysts when he announced his latest plan. “It is different this time. We are different.”

He said that was partly because the bank wasn’t raising capital and was tackling its problems head-on. It is shutting its equities business, for example, not just trimming at the edge. And there’s a new management team in place.

“We are in relentless execution mode. I am; my team is. To us, action speak louder than words,” Sewing said.



So what are the key goals? Sewing’s number one target is to get group return on tangible equity to 8% in 2022. That may not look stretching compared with the 17% delivered by JP Morgan last year, but it’s far off for Deutsche after four consecutive years of negative returns.

Sewing has set other core targets for 2022 related to costs, capital and leverage (see table).

He pledged to slash adjusted costs by a quarter to €17bn; cut the cost/income ratio to 70% from 93%; and improve the leverage ratio to about 5%. He has lowered the target for common equity Tier 1 to 12.5%, from 13% previously, to free up €5bn of capital to distribute in the future.

Analysts said the targets are challenging but realistic, especially as cuts were already underway. About €2bn of the €6bn of cost cuts were already expected by analysts, as were about 7,000 of the 18,000 job cuts.

Hitting revenue ambitions looks set to be the biggest task. Sewing has set an “aspiration” - rather than a hard target - to reach €25bn of revenues in 2022, based on “realistic growth assumptions” from core bank revenues of €22.8bn last year.

“The targets they’ve set are ambitious and there are lots of executions risks - both in growing revenues 10% by 2022 and also the objective to take out 25% of costs in a world where most banks have to spend increasingly on compliance and IT,” Kames’ Norrman said.

“But even if they don’t fully meet those targets, it’s still a step in the right direction,” he said.

Autonomous analyst Stuart Graham also flagged the potential to miss on revenues. “We think this will be a big debating point for investors since that would seem to imply a revenue CAGR of 3% over 2018-22 and no revenue attrition elsewhere in the business - which seems very optimistic,” Graham said in a research note.



Unlike some Deutsche targets of the past, most of the new goals involve data that are routinely reported each quarter, so progress - or lack of it - should be transparent.

Sewing has also set some interim targets as a staging post before 2022. He intends to get costs down to €19.5bn in 2020 on the way to the 2022 target, for example.

Other significant targets include reducing headcount to 74,000, lifting RoTE for the investment bank to 6% and slashing assets in a new capital release unit to €9bn from €288bn now.

Michael Rohr, a senior vice president at Moody’s, said Deutsche’s plan might be the most realistic of its recent attempts, but it was “a daunting work in progress.” Moody’s maintained its negative outlook on the bank.

“The significant cost and execution risk, as well as the potential disruptiveness of this latest, more radical strategic revamp highlights the persistent profitability and business model challenges facing Deutsche Bank and will continue to constrain the firm’s credit strength over the next 12-18 months,” Rohr said.


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