Deutsche Bank: The End Of Ambition – Forbes

Halfway through the first serious equity trading session of 2020 the share price of Deutsche Bank is 7.051, a decline of 2.74% on the day and not so far off the three-year low of 5.921 booked on June 3, 2019.

The short-term technical outlook for the stock is negative, with buying signals only appearing at a “Daily” and “Weekly” level. However, move out to the one-month period and the technical sentiment turns sour once again. The reason why this cloudy vision persists is that no one is sure just how many problems Deutsche Bank actually has.

The Chief Executive Officer (CEO), Christian Sewing has had to implement a pragmatic program of austerity after the share price collapse in 2019 amid a series of profit warnings, investigations and a failed proposal to merge with an equally troubled domestic competitor, i.e. Commerzbank.

Looking ahead into this new year one must ask if the institution that was once the tip of the European spear that took on the dominant American investment banks is able to survive for much longer as a separate entity?

What Has Gone Wrong?

Deutsche has been engulfed in a spiral of declining revenue, enduring expenses, a declining credit rating and hence, a rising cost of capital.  There has been an issue of having stuck with outdated technology instead of investing in the latest equipment that could have boosted efficiency and a drain of top talent. Finally, there have been a series of fines worth $18 billion since the financial crisis as the bank was found guilty of misconduct.

Of course, the era of low to negative interest rates has made the ability to earn money on margin increasingly difficult and the shares are down about 90% from their 2007 peak.

The CEO has tried to arrest the decline via a wave of austerity to pare expenses down to a level more in line with the size of the bottom line. Outgoings as a share of income run at 96% cf. 82% at Credit Suisse, 70% at Soc Gen and just 55% at the world’s most successful bank, J.P. Morgan Chase from the U.S. (Source: Bloomberg)

So far, Deutsche has been losing business as the investment banking division, that at one time delivered over half of all revenue, has lost market share to rivals that were quicker to fix balance-sheet and governance weaknesses after the 2008 financial crisis.

Is There Any Light In Sight?

Sewing has accelerated the cost cutting and scaled back on any pretence at a global ambition. Deutsche has abandoned equities trading and he is still seeking to cut the overall workforce by a further 20%. At the end of Q3 2019 Deutsche Bank had just under 90,000 employees versus the 97,000 head count when Sewing took over in April 2018.

As the 150^th anniversary of the bank approaches in March the restructuring remains in place and that the bank will continue to decline in size and stature. The retreat from equities trading and reducing fixed income making has left Deutsche Bank with € 360 billion ($396 billion) worth of assets t did not need.

That was worth 25% of the balance sheet although half of them have been sold via the specialist vehicle acting as a wind-down unit.

The good news is that the capital that was allocated to those assets will be released as they melt off the balance sheet and will then be shifted to higher-earning areas. However, it will take time to gain traction in the space for trade finance and cash management needs of larger companies.

Fading Future

I am fearful for Deutsche’s future prospects as we have entered an era where commission from trading has all but vanished and the margins to be made in market making are wafer thin. So, it is a concern that Sewing appears to be back in love with the residual investment bank he has left.

So much so, that he has elevated the target for 2022. He suggests that the investment bank will be the fastest growing business unit and has simultaneously lowered his optimism for the asset management and private banking units.

He is far too optimistic as Europe, if not Germany is overbanked and Deutsche is becalmed near the bottom of many league tables. For example, Dealogic places it at 15^th in mergers and acquisitions for all of 2019 down from 14^th in 2018.

I have to ask, if Sewing were really so optimistic, he could have restored the dividend, he has not, so clearly the balance sheet is not looking too healthy and this institution is at risk of losing its status as a key banking operator.