The year of the 150th anniversary will be for the Deutsche Bank the year of truth. After losing billions in 2019, the Frankfurt money house 2020 has to prove that the largest renovation in the company’s history is working and the cracks in the foundation are being cemented.
“This time is different” – the time of broken promises is over, CEO Christian Sewing swears. However, just a few months after the announcement of his new strategy, due to the low interest rates and fierce competition, he is already tipping over the growth targets for private and corporate customers, which will actually be the focus in the future.
Now of all things Investment Banking save the lost profit target. The division was responsible for some horrendous losses in the past and was supposed to slim down according to the will of the 49-year-old.
The previous year’s period was particularly weak
“You can buy Sewing that Deutsche Bank is serious about the renovation this time,” says bank analyst Philipp Häßler from the brokerage firm Pareto Securities. “But it has also become clear that investment banking remains a linchpin.”
The second largest division of the bank, founded in March 1870, is expected to compensate for subdued growth prospects in other branches by 2022, in order to achieve the institute’s return target of eight percent. Trading in fixed-income securities and foreign exchange was much better in October and November than in the previous year, as Sewing recently explained at the Investor Day. But experts are skeptical whether it will stay that way.
On the one hand, a closer look at the balance sheets reveals that the previous year’s period was particularly weak. At that time, income from bond and foreign exchange trading declined by almost a quarter compared to the final quarter of 2017 to EUR 786 million. On the other hand, experts expect that business in general has lost its shine – at least for European banks. US companies like JP Morgan or Goldman Sachs are taking their butter off their bread.
“The US institutes are something like the Roman Army. The only thing that matters to them is growth,” says analyst Amrit Shahani of the Coalition data service. “When it comes to products where they are not yet number one, they definitely want to be number one and are attacking hard.”
The main motto is saving
JP Morgan analyst Kian Abouhossein expects Deutsche Bank’s bond and currency trading earnings to decline 2.5 percent annually through 2022. By contrast, Deutsche Bank investment banking chief Mark Fedorcik is predicting two percent growth per year.
The American has high hopes for cost reductions, better technologies and the reduction of jobs in the back office. He also wants to expand collaboration with corporate client advisors to better support companies in capital market deals and generate more income.
The swing is not well received by all investors. “It is surprising that Deutsche Bank is turning to investment banking again,” says portfolio manager Alexandra Annecke of the fund company Union Investment, which holds shares in the bank. “The capital market still has doubts here. Investors will only believe in a renaissance of investment banking if they see it in the numbers.”
At the beginning of July, Sewing announced that it would shrink bond trading, completely reduce the share business and focus on private and corporate customers. “If Sewing is already highlighting the progress in investment banking, this can be a sign that the bank is lagging significantly behind in other areas,” warns investor lawyer Klaus Nieding from the German Protection Association for Securities Ownership (DSW).
At the end of September, the investment bank accounted for almost a third of the total income of EUR 17.8 billion. The business with around 19 million private customers was responsible for 35 percent of the revenue, the corporate customer division for 22 percent. The low key interest rates and fierce competition make it difficult for Deutsche Bank and other companies in the euro zone to achieve adequate returns with private and corporate customers. Sewing is therefore pursuing a radical austerity program across the Group: it plans to cut 18,000 jobs worldwide and cut costs by around six billion euros by 2022.
Sewing needs to regain a lot of credibility
Most investors are behind the CEO, who started his career in 1989 as an apprentice in a Bielefeld branch. “Especially when it comes to his cost targets, Mr. Sewing has a high level of trust,” says Annecke. However, he has to regain a lot of credibility.
“The bank has since financial crisis often announced changes – and often did not deliver, “says Häßler. The shares of the institute have been bumping around seven euros for months, since Sewing started in April 2018 they have lost around 45 percent. Sewing, in particular, cannot worry about a further capital increase create the world, although he always emphasizes that there are no plans for it.
He doesn’t have too much time to switch the tanker with its almost 90,000 employees. “At the latest at the Annual General Meeting in May, Deutsche Bank must make significant progress,” says Nieding. “The restructuring of the group is the last shot Deutsche Bank has. It has to sit now.”