The scaling back of Deutsche Bank’s US operations announced on Thursday was welcomed by investors and analysts but left some unhappy with the lack of detail on the lender’s change of direction.
Christian Sewing, the lender’s new chief executive, described his bank of the future as one whose fundamental characteristics were “deeply rooted” in wholesale banking in Europe, after he announced a dismal first-quarter performance that undershot analyst expectations.
Pre-tax profit of its corporate and investment bank (CIB) slipped almost three quarters, while the division’s return on tangible equity stood at just 1.5 per cent, compared with a target of 10 per cent.
But while Mr Sewing was heavy on rhetoric, he was light on detail. His plan includes big cuts for the US rates business and corporate finance activities within the US and Asia that have little cross-border implications. Deutsche’s global equities business is also under review.
A large investor in Deutsche pointed out that dropping the vision of being a globally leading investment bank that operates in all regions, product categories and customer was the “right step and long overdue”.
The bank said the cuts would entail quick and significant job reductions outside of Germany, but did not spell out how many of its 10,000 US employees will be dismissed, how much CIB assets will be cut by, or how much revenue will be forgone.
“For now we still have more questions than answers,” Andrew Coombs, an analyst at Citi, wrote in a note to clients.
James von Moltke, Deutsche’s chief financial officer, suggested that more details may be revealed either at the bank’s annual meeting on May 24 or at the second-quarter results presentation in late July.
A second large investor in Deutsche welcomed that Mr Sewing was willing to act quickly and decisively, but pointed out that the plans were still pretty vague. “The next step is to back the plans up with facts and figures, and then he obviously has to deliver.”
Kian Abouhossein, an analyst at JPMorgan, said: “As an analyst I want them to tell me [more detail on the restructuring] before they do things.”
He added: “From a business perspective they probably just want to get on with it and tell people when they have done it.”
Some of the targeted US activities are highly lossmaking. JPMorgan analysts estimate that in US equities trading, Deutsche is spending €1.25 in costs for every €1 in income.
In the US, Deutsche is already outside of the top 10 US investment banks as measured by Dealogic, which looks at fees for investment banking services such as advising clients on capital raising and M&A.
Only two European banks — Barclays and Credit Suisse — appear in the league tables, a testament to the difficulties European banks have in markets where corporate relationships transcend generations. Bankers say Barclays and Credit Suisse’s success, such as it is, was only possible because of the homegrown Wall Street businesses they bought from Lehman Brothers and First Boston.
One of the few things that is certain is that despite the pivot to the European home market, Deutsche’s plan falls short of an overall retreat from the US. “These actions are targeted to create a more profitable, higher margin US business. We are not withdrawing in total from US CIB,” Mr von Moltke told analysts.
Another safe bet seems to be Mr Sewing’s determination for fast and rigorous action. The lender has already begun sacking US-based investment bankers, a person with knowledge of the matter told the Financial Times. He said more job cuts would follow quickly.
Mr Sewing told analysts he would “change the path of our bank now. There is no time to wait.”
In the short term, the restructuring can create additional headwinds for Deutsche. Mr Coombs warned that revenue might fall faster than costs and that other businesses could be affected. “The pullback from US and Asian corporates could have a knock-on impact to the credit and foreign exchange business,” he wrote in a note to clients.
Mr Sewing wants to focus Deutsche on its traditional roots in European wholesale banking and financing European corporates, stressing the lender’s almost 150-year legacy in that area.
In pure investment banking, Deutsche in the first quarter of 2018 retained the top spot in Germany, according to Dealogic data. But its position in the wider Emea region is challenged: the lender dropped to fifth place behind JPMorgan, Citi, Goldman Sachs and Barclays in the same period.
The European market is also more fragmented and intensely competitive. While the top 10 banks in the US earn almost two-thirds of the investment banking fee pool, the top 10 earn less than 50 per cent in Europe, the Middle East and Africa, according to Dealogic data.
At €300m, the direct restructuring costs linked to the plan announced on Thursday are small, compared with Deutsche’s 2017 annual non-interest expenses of €24.7bn.
Stuart Graham, chief executive of Autonomous Research, argued that the relatively small price tag of the additional steps suggested that the scale and scope of the cuts seemed limited. He pointed to a common rule of thumb suggesting that restructuring costs stand at between 100 and 150 per cent of cost savings.
“That implies €200m to €300m of cost savings,” noted Mr Graham, adding that this represented about 3 per cent of the CIB costs outside Europe. “Frankly, that looks like tinkering to me,” he said.
By 2021, Mr Sewing’s ambition is to lift the share of revenue from stable sources — retail banking, asset management and global transaction banking — to 65 per cent by 2021, up from about 54 per cent in 2015, the last year before the investment bank fell into crisis mode.
Based on the bank’s current structure, this target could imply that the advisory business, as well as the sales and trading activities, shrink by about €1bn, or 10 per cent, according to an FT calculation.
“We want to become a bank that is more balanced,” Mr Sewing told analysts, adding that the future of the investment bank itself was not in question. “CIB will always be a cornerstone of Deutsche Bank.”
Nonetheless, Mr Sewing’s mindset marks a “180 degree change” for Deutsche, said Mr Abouhossein of JPMorgan. “For the first time, we have Deutsche Bank . . . focusing on profitability and being more nimble and being smaller.”
Get alerts on Deutsche Bank AG when a new story is published