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Deutsche Bank AG has given up waiting. After years spent adrift hoping that its ambitions to compete with Wall Street would come good again, Germany’s biggest bank has sounded the retreat.
Chief Executive Officer Christian Sewing’s overhaul may not be particularly imaginative — but it is what the lender needs if it is to do more than just survive. After five restructurings in four years, the depth of his cuts mark the latest plan out as a real attempt to change course. He deserves a fair hearing.
If they can stand the painful initial costs of the restructuring and all goes well, investors should eventually be rewarded with buybacks and dividends. But the destruction of shareholder value to date has been so grave, they are unlikely to give this reboot a second chance. Sewing needs to provide details about how he will cut costs and deliver the most elusive thing of all: Revenue growth.
Deutsche Bank announced it will shrink its trading activities by 40 percent through an unprecedented withdrawal from equities — a loss-making business in a market where it lags peers. In fixed-income, rates operation will also be scaled back. About 18,000 jobs, almost 20 percent of the workforce, will go eventually.
Sewing is jettisoning what Deutsche Bank was never very good at and pivoting away from hedge-fund clients to focus on corporate customers. In time, earnings should be less volatile and more evenly spread between the commercial lending, trading, asset management and private banking operations.
The revamp is starting with some of the most senior executives. Three board members will leave and, symbolically, some of the investment bank’s old guard are also departing, including Garth Ritchie, who led the unit.
Deutsche Bank has to convey both internally and externally that, this time, change means change. Accepting this hasn’t been easy. It involves the humility of giving up on a two-decade effort to be the Goldman Sachs Group Inc. of Europe — a course that was marked by its acquisition of Bankers Trust Corp. in 1999.
Since the financial crisis, though, Deutsche Bank has been hobbled by higher regulatory costs, record-low interest rates, and more than $18 billion of fines. Complex transactions soaked up more expensive capital, while the business of trading bonds — the firm’s engine during the boom — shriveled.
The result: ever dwindling revenue and profitability.
Crucial to the success of Sewing’s plan will be his ambitious attempt to shrink the firm’s balance sheet. Non-core assets will be moved to a bad bank. About 288 billion euros ($323 billion) of the so-called leverage exposure associated with these assets should be wound down in three years. That should help to improve the leverage ratio to 5 percent, from 3.9 percent at the end of March, and enable the firm to return capital to shareholders.
—Bloomberg