Deutsche Bank’s overhaul plan gets cautious thumbs up
The restructuring includes downsizing its investment bank, eliminating 18,000 jobs, creating a bad bank and changes to its management team
Analysts welcomed Deutsche Bank’s restructuring plan, even as they said costs may be higher than estimated and noted the new targets for the bank may be too ambitious.
The overhaul, announced Sunday, includes the downsizing of its investment bank, the elimination of 18,000 jobs, the creation of a bad bank and changes to its management team. The bank is also cancelling the dividend for this year and next. Delivery of the plan will be key and some questions still remain, analysts said.
Deutsche Bank shares jumped as much as 4.4% after the company unveiled its new plans, and the German lender was the largest gainer on the Stoxx 600 banks index on Monday. Before then, the shares had lost more than a quarter of their value in the past year.
Here’s what analysts are saying about Deutsche Bank’s plans:
Morgan Stanley, Magdalena Stoklosa (underweight)
- Stock could “bounce” in the short term but a potential re-rating will depend on details of the execution. The new targets seem ambitious. There are concerns about capital and ratings in the short-term, as the bank will be run at “the lowest headroom bar” among large European banks
BoAML, Andrew Stimpson, Alastair Ryan (underperform)
- It is an ambitious plan, with larger cost cuts and higher targeted return on tangible equity (ROTE) than expected. Capital is to remain in focus, leaving strategy in the hands of the regulators as it is not clear at which level the bank will be forced to raise capital or take other actions to improve capital. Revenue also remains a key element and analysts note that they struggle to see how Deutsche Bank will advance without higher rates, which seems unlikely for now
Goldman Sachs, Jernej Omahen (neutral)
- The scope and scale of announcements surprised as they show a very deep restructuring. The size of the new run-off unit at €74bn of risk-weighed assets is meaningfully bigger than expected. The costs of restructuring of €7.4bn will be higher than estimated. New profitability targets of achieving an 8% return on tangible equity in 2022 are below the estimate of the bank’s cost of equity, are low vs peers and ambitious for the bank. Some structural challenges at the bank remain, such as the absence of a high-return platform, high funding costs and uncertainty around the scope of its investment bank
RBC, Anke Reingen (underperform)
- The overhaul is more radical than expected, and may support shares in the short term. Profitability will remain low in the near term and there is little visibility on its ability to improve returns. There is a risk the bank will have to increase capital: “It is surprising that regulators allow DBK to run with a minimum CET 1 ratio of 12.5%.”
Citi, Andrew Coombs, Nicholas Herman
- Restructuring charges of €7.4bn are heavier than anticipated, and have been spread out over four years. The targets may prove to be optimistic.
• With Hanna Hoikkala, Sam Unsted, William Canny, Lisa Pham and James Cone