Will Deutsche Bank Successfully Follow Through On Its Biggest Restructuring Plan Till Date?

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Deutsche Bank

Deutsche Bank (NYSE: DB) has yet to successfully turn-around its operations after the impact of the 2008 recession. While stricter regulatory requirements weighed on Deutsche Bank’s revenues, the bank spent billions in legal and restructuring costs over the years – leading to a steady decline in its share price over the years. Notably, Deutsche Bank’s stock has slumped in value from a high of $110 in 2007 to less than $7 now. With an aim to get things in shape, the bank recently announced its largest restructuring plan till date.

Trefis captures the impact of Deutsche Bank’s Reorganization Plan on various aspects of its business model in an interactive dashboard, parts of which are shown below. Further, we have revised Deutsche Bank’s valuation downwards from $9 a share to $7.

Summary of Key Changes Proposed:

  • The new plan marks an overall shift towards more stable revenue sources
  • As per the new plan, Deutsche Bank will exit its Equities Trading business while retaining a focused equity capital markets operation.
  • Additionally, the bank plans to resize its Fixed Income Trading operations – in particular its rates trading business – and will accelerate the wind-down of its existing non-strategic portfolio .
  • This is a notable step for the German banking giant, given that Equity and FICC trading generated roughly 30% of the bank’s revenues in 2018.
  • This radical measure is expected to reduce revenue contribution of Deutsche Bank’s Corporate & Investment Banking (CIB) division to 42% in 2020 from 52% in 2018
  • At the same time, the Private & Commercial Bank (PCB) division’s contribution is expected to jump to 47% in 2020 from below 40% in 2018.
  • The proposed changes mean that the bank will do away with a potentially high-return business in the near future, even as elevated funding costs and uncertainty around the scope of the bank’s Investment Banking operations weigh on profitability.
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KEY CHANGE #1: The Bank Will Exit the Equities Sales & Trading business

  • Deutsche Bank’s Equity Trading business will be completed phased out by 2021.
  • We estimate the bank’s Equity Trading portfolio to shrink from over €55 billion in 2018 to just €11 billion by the end of 2019
  • Revenues from the equity trading desk are also expected to fall to merely €400 million from around €2 billion in 2018.
  • However, the Investment bank will continue to focus on its traditional strengths in financing, advisory, fixed income and currencies.

KEY CHANGE #2: Global Fixed Income Trading business to be scaled back

  • DB plans to resize its Fixed Income operations – in particular its Rates business – with an aim to reduce risk-weighted assets currently allocated to these businesses by approximately 40%.
  • As a result of these changes, the bank’s Fixed income trading securities are expected to go down by almost 30% to around  €11 billion in 2019 while revenues are expected to slide by almost €2 billion to €3.4 billion

KEY CHANGE #3: Focus on core banking business including wealth management to increase

  • As per the new plan, the bank intends to focus more on its retail banking and wealth management
  • This should help the bank to achieve steady growth in revenues over coming years.
  • DB expects its total revenues to steadily increase to around 25 billion euros in 2022.
  • Moreover, reducing the higher-risk business should help the bank achieve a better profitability in the long run, as the bank was unable to generate constant acceptable returns from its capital-intensive and highly leveraged equity trading business.

KEY CHANGE #4: Massive cost-cutting measures are expected to be undertaken

  • The bank will lay-off approximately 18,000 full-time equivalent employees and also expects to reduce adjusted costs by approximately 6 billion euros to 17 billion euros in 2022.
  • Moreover, the bank aims to reduce its cost-income ratio to 70% in 2022 and targets a post-tax Return on Tangible Equity of 8% at the Group level by 2022.
  • To implement the transformation, the bank expects one-off charges including impairments, restructuring costs and severance payments of €7.4 billion by 2022. For 2019, the total impact is expected to be approximately €5.1 billion .

Conclusion

We believe that Deutsche Bank’s transformation plan, which includes reducing higher-risk businesses that were unable to deliver constant justifiable returns, will have an overall positive long-term impact on its profitability. The critical thing, though, is for Deutsche Bank to implement these changes successfully – something it hasn’t been unable to do as a part of the series of restructuring plans it has proposed over the last several years.

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