Deutsche Bank’s New Restructuring Plan Trades Off Some Long-Term Value For Stability

-25.52%
Downside
15.77
Market
11.75
Trefis
DB: Deutsche Bank logo
DB
Deutsche Bank

Deutsche Bank (NYSE:DB) recently announced what was its fourth reorganization plan in the last three years alongside underwhelming results for the first quarter of 2018. While the plan by incoming CEO Christian Sewing merely builds on ex-CEO John Cryan’s Europe-focused approach for the largest German bank, the single biggest change proposed by Sewing is a sharp reduction in the bank’s U.S. securities trading operations. We capture the impact of the reorganization plan on various aspects of Deutsche Bank’s business model as a part of our interactive dashboard for the bank, parts of which are shown below. Further, we have reduced our price estimate for Deutsche Bank’s stock from $18 to $16.

Despite its negative impact on Deutsche Bank’s share price, Sewing’s new plan has merit. This is because Deutsche Bank’s U.S. trading operations have struggled over recent years to contest the dominance of U.S.-based banking giants like JPMorgan, Goldman Sachs and Morgan Stanley in their home market. Securities trading activity in the U.S. has a strong outlook over coming years, and Deutsche Bank’s decision to shrink its presence in the lucrative market means that it will give up on some potential upside. However, the move will allow Deutsche Bank to free up billions of dollars in precious capital tied up with its U.S. trading desks – something that may prove critical for the bank’s stability in the near- to mid-term. This, of course, assumes that Deutsche Bank sticks to its reorganization plan this time around and channels the freed-up capital in the right direction.

See our full analysis for Deutsche Bank

Relevant Articles
  1. Up 18% in 2023, Where Is Deutsche Bank Stock Headed?
  2. What To Expect From Deutsche Bank Stock?
  3. What To Expect From Deutsche Bank Stock?
  4. Is Deutsche Bank Stock Fairly Priced?
  5. What To Expect From Deutsche Bank Stock?
  6. Where Is Deutsche Bank Stock Headed?

Understanding Deutsche Bank’s New Reorganization Plan

The new plan marks an overall shift towards more stable revenue sources, while cutting down on volatile securities trading revenues – particularly from the U.S. The bank’s Private & Commercial Banking and Asset Management operations are expected to contribute 50% of the bank’s total revenues by 2021, and an additional 15% of revenues by 2021 are likely to come from Global Transaction Services – for a total of 65% of revenues from these “core business lines.” This leaves the investment banking operations contributing 35% of total revenues – as opposed to the existing strategy of equally weighing investment banking and the other stable revenue sources.

Notably, these three core divisions have grown in importance over recent years, with their combined revenue contribution increasing from ~54% in 2015 to ~63% in 2017, as detailed in the chart below. However, this was primarily due to a relatively soft investment banking performance.

The key changes proposed by Deutsche Bank in the new reorganization plan are detailed below:

  • U.S. Rates Trading unit to be scaled back: This will result in a sharp decline in FICC trading assets for 2018, and slower growth in these assets over the coming years. We do not expect any change to the our forecast for the bank’s FICC trading yield

  • Global Equities business is under review to reduce its size: Deutsche Bank is likely to do away with (or substantially scale back) its prime brokerage unit, and may implement sizable cuts to its U.S. equity trading desk. We do not expect any change to our forecast for the bank’s equity trading yield

  • Corporate Finance unit to focus on European clients, cut exposure in the U.S. and Asia: This should have a noticeable impact on Corporate Finance revenues over coming years, as shown below.

  • Additional cost-cutting measures to be undertaken: The focus of these efforts will be to simplify Deutsche Bank’s structure while doing away with several senior management roles to realize immediate cost savings. The bank will also aim to reduce vendor and real estate costs, while trying to improve efficiency of internal controls. Moreover, the changes aimed at reducing the investment banking and corporate finance activities outside Europe will have a notable impact on the bank’s headcount – with margin gains expected to be realized as soon as 2019 across divisions. However, we expect a slight reduction in margins for the investment banking division for 2018 due to increased restructuring and severance costs associated with the new plan.

We expect Deutsche Bank’s new reorganization plan to reduce its EPS for full-year 2018 from our original estimate of EUR 1.35 to EUR 1.20. Using the new figure of EUR 1.20 with our estimated P/E ratio of 11, this works out to a price estimate of $16 for Deutsche Bank’s shares (assuming a EUR-USD exchange rate of 1.2).

In case you disagree with any of our forecasts, feel free to modify them in our interactive model to come up with your own forecast for Deutsche Bank

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs
For CFOs and Finance Teams | Product, R&D, and Marketing Teams
More Trefis Research
Like our charts? Explore example interactive dashboards and create your own