Deutsche investors want turnaround details
Leading shareholders in Deutsche Bank want new CEO Christian Sewing to flesh out the details of the turnaround plan he outlined for the German lender in April.
Four of the bank’s top investors want the CEO to provide specifics on where he wants to scale back the investment bank when he reports second-quarter earnings on Wednesday. Two of those said more radical measures than Sewing had proposed were needed. The investors asked not to be identified.
“The crucial question for investors is just how deep a restructuring Deutsche Bank needs to achieve sustainable profitability,” said Alexandra Annecke, a fund manager at Union Investment, which owns about 0.15% in the bank, according to Bloomberg data.
Sewing’s restructuring plan — the fourth in three years for Deutsche Bank — is centred on more job cuts and reductions to the investment bank.
Some details have trickled in: at least 7,000 roles will be eliminated, with a focus on the US operations and the global equities business.
At the same time, Sewing confirmed his commitment to the investment bank, saying it would always account for at least half of the bank’s revenue.
But what exactly will remain of the securities unit after the cutting is done goes to the core of Deutsche Bank’s woes. For years, the lender has tried to right-size the business without being able to reshape it into a sustainable operation. Revenue has declined faster than costs, eroding profitability further and leaving investors and clients wondering when and how the contraction will stop.
“To date, revenue attrition has far outpaced cost reduction,” Citigroup analysts led by Andrew Coombs wrote in a research note earlier in July. “It is tough to see how this trend reverses quickly.”
Preliminary second-quarter results unveiled by Deutsche Bank on July 16 suggested revenue and adjusted costs were broadly flat compared with a year earlier. Net income of about €400m was well above the €159m analysts had predicted, sending Deutsche Bank shares 7.3% higher that day. The stock is still down about 35% in 2018.
Yet much of the profit surprise seemed to come from one-off items, which did little to quell the questions about the investment bank. Deutsche Bank seems to have continued to lose market share in the second quarter compared with its US rivals in trading securities.
Sewing has announced he will reduce the bank’s dealings with hedge funds, its US rates business, its equities footprint globally, and corporate finance in US and Asia.
But various analysts have said that bigger steps are possible, with Citigroup saying in its research note that one “aggressive” alternative scenario would be for Deutsche Bank to leave the US and equities trading altogether. Sewing has repeatedly ruled out a full withdrawal from the US.
In the longer run, if Sewing cannot cut costs more quickly than the bank loses revenue, a deeper restructuring may become inevitable.
The bank has hired a unit of Cerberus Capital Management, Stephen Feinberg’s private equity firm, to advise it on how to reach Sewing’s profit targets.