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A little over one year since Deutsche Bank AG Chief Executive Officer Christian Sewing unveiled his first turnaround plan, his second is taking shape.
Sewing is zeroing in on another round of deep trading cuts that may result in the shuttering of U.S. equities trading, as well as the creation of a non-core unit to wind down as much as 50 billion euros ($56 billion) in unwanted assets, according to a person familiar with the matter. Cuts to the rates business are also likely, said the person, asking not to be identified in disclosing the private deliberations.
A complete exit from U.S. equities trading isn’t the favored outcome at this point because the lender wants to be able to meet the needs of European clients seeking access to U.S. markets, the person said. Members of the supervisory board discussed options on a call last week, said another person.
The measures would deepen cuts announced shortly after Sewing took over last year, which included a 25% headcount reduction in equities trading as well as cuts to rates trading. Those steps so far have failed to boost profitability as much as initially hoped, as markets remain challenging and past missteps continue to haunt the lender.
The reported “plan looks far too modest to us,” said Andrew Lim, an analyst with Societe Generale SA, in a note. “We estimate Deutsche Bank is making very low profits or indeed losses in its trading businesses” that are likely to get worse as it loses market share.
Bloomberg previously reported that Sewing plans to set up a non-core unit housing long-dated derivatives as part of “deep cuts” to the equities business, while focusing more on the transaction bank. Given the costs of the restructuring, the lender won’t meet its profitability goal for this year, according to Handelsblatt, which said that the equities business in Japan could also be cut. Headcount will fall more than previously communicated, the newspaper said, citing company insiders.
“As we said at the annual general meeting on May 23, Deutsche Bank is working on measures to accelerate its transformation so as to improve its sustainable profitability,” a spokeswoman said by email on Monday. “We will update all stakeholders if and when required.”
Shares of Germany’s largest lender rose 1.4% at 5:16 p.m. in Frankfurt trading. The stock is down 12% this year and reached a record low earlier this month.
The non-core unit will likely end up holding between 30 billion and 50 billion euros of risk-weighted assets, said one of the people. Deutsche Bank had 347 billion euros in risk-weighted assets at the end of the first quarter. The Financial Times reported the figure earlier and said Deutsche Bank may cut or even close its equities trading business outside Europe.
Non-core units, sometimes called “bad banks,” are set up by lenders to sell or wind down assets they no longer want to own, often hard-to-sell or risky holdings. They were used frequently after the financial crisis, and they can be helpful when banks exit a business so that investors can see better how the main operations perform. Deutsche Bank last set up a non-core unit in 2012, when it identified about 125 billion euros in risk-weighted assets it wanted to shed.
Sewing has pledged “tough cuts” to the investment bank as he tries to reverse a share-price slide that left Deutsche Bank with the lowest price-to-book-value ratio of the 37 lenders in the Bloomberg Europe 500 Banks and Financial Services Index. The firm’s credit rating was lowered this month by Fitch Ratings, which could increase funding costs.
The CEO is also tasked with restoring market confidence in Deutsche Bank following the breakdown of takeover talks with Commerzbank AG. Sewing had explored a merger with Commerzbank to end what Deutsche Bank has called a “vicious circle” of declining revenue, sticky expenses, a lowered credit rating and rising funding costs. The talks collapsed in April, leaving investors guessing what’s next.
Deutsche Bank’s equities business is the smaller of its two main trading operations, with revenue of about 2 billion euros last year, compared with 5.4 billion euros from fixed income, which is considered a traditional strength of the bank. The equities unit is run by Peter Selman, a former Goldman Sachs Group Inc. partner brought on by Sewing’s predecessor John Cryan in 2017. Progress in fixing the business has been slow, with the unit incurring an estimated loss of about $750 million last year, people briefed on the matter have said.
Equities trading has been a focus of cutbacks for some time. Cryan initially vowed to boost the unit but later, after a scare in 2016 led some hedge funds to pull money from the firm, pivoted the bank away from its focus on institutional clients toward corporate ones.
Sewing accelerated that shift shortly after taking over in April last year, trimming staff and resources in the U.S. and severing ties with funds whose business wasn’t lucrative. He also scaled back U.S. rates sales and trading and reduced the corporate finance business in the U.S. and Asia.
As part of the next strategy overhaul, Sewing is also considering giving more visibility to the transaction bank, which is usually overshadowed by the trading units, people familiar with the matter told Bloomberg in May. The idea is to give investors a better view of a relatively large and growing business to help improve Deutsche Bank’s low valuation, they said.
(Updates with profitability target in sixth paragraph.)
--With assistance from Jan-Henrik Förster and Nicholas Comfort.
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