(Bloomberg Opinion) -- Ever since Deutsche Bank AG abandoned talks to merge with Commerzbank AG in April, a drip-feed of information on what Germany’s biggest lender plans next has leaked out.
For Chief Executive Officer Christian Sewing, the danger is that he finds most of his cards have been played well before he can unveil his overhaul at the end of next month. He can ill afford to disappoint investors. Deutsche Bank has presented four strategic overhauls in as many years, not one of which has been able to stop the shares from plumbing new record lows. The firm is valued at just one quarter of its tangible book value – the steepest discount among its peer group.
This week, the Financial Times reported that Sewing will transfer about as much as 50 billion euros ($56 billion) of trading assets – mostly long-dated derivatives – into a so-called bad bank. The firm is also considering plans to close its equities and rates trading businesses outside Europe.
Exiting U.S. equities and rates has been a long time coming. A retreat from the U.S. securities business is a shift many (including yours truly) have argued is worth pursuing in light of Deutsche Bank’s sub-scale presence in the market. Global equities has been a sore spot for the firm, racking up annual losses of about 600 million euros, according to estimates from JPMorgan Chase & Co.
What investors are still missing, though, is a clearer sense of how a smaller footprint would help restore profitability. Even if Deutsche Bank were able to finance the retreat from capital-intensive businesses without having to tap investors for more funds, sustainable returns remain a distant prospect.
The bank had been counting on growing revenue this year to reach a 4% return on tangible equity. Given the dire outlook for trading in the second quarter after a contraction in the first, it’s hard to imagine that objective will be met.
Return on tangible equity stood at 1.3% in the first quarter. Further cost-cuts beyond the investment bank may be necessary. According to JPMorgan, annual firm-wide costs may need to drop to 18 billion euros from 22.8 billion euros in 2018 for the firm to stand a chance of reaching a ROTE of 5% or more by 2021.
What is also missing so far from Sewing’s vision is a sense of how and where the firm can grow as interest rates are likely to stay lower for longer. At home, the commercial bank, which generates about 40% of revenue, faces stiff competition from savings and cooperative lenders that is squeezing margins.
Sewing is considering giving a boost to the firm’s transaction banking business, which tends to be overshadowed by the trading units, Bloomberg News reported in May. What that will mean in practice hasn’t been articulated. To keep up with the competition in payments and cash management, the lender will need to spend on technology. For the commitment to be credible, it will need to come with a big number attached.
All that said, Sewing deserves to have a shot at putting his own mark on the company. The merger talks with Commerzbank have overshadowed a lot of his work so far. He has over-delivered on cost-cutting under the existing (if unambitious) plan. But with a German recession just around the corner, time isn’t on his side. He urgently needs to communicate his vision for Deutsche Bank – and on his own terms.
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Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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