Business Irish

Tuesday 16 July 2019

Revamp may make it right time to buy Deutsche Bank

Restructure: Deutsche Bank boss Christian Sewing has pledged ‘tough cutbacks’ to help boost profits
Restructure: Deutsche Bank boss Christian Sewing has pledged ‘tough cutbacks’ to help boost profits

Christopher Thompson

Christian Sewing can't catch a break. The Deutsche Bank boss has seen the German lender's market value shrivel to just €13bn. Now he is preparing to take the axe to its underperforming investment bank. Rock-bottom expectations give him scope to spring a positive surprise.

At Deutsche's annual general meeting last month, Sewing pledged "tough cutbacks" to reinvigorate profitability. The bank's equities and fixed income trading businesses, particularly in the United States, are prime targets.

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Deutsche may earmark risk-weighted assets worth €50bn - about a fifth of the investment bank's total - to be wound down or sold, the 'Financial Times' reported.

The question is how much this would cost.

A big restructuring charge would push the bank into the red again, dragging its common equity Tier 1 capital ratio below the bank's 13pc target and forcing Sewing to raise more capital.

It may not come to that, though. When rival Credit Suisse restructured its investment bank between 2015 and 2018, estimated losses were about 4pc of the assets it offloaded. A similar ratio at Deutsche Bank would mean €2bn of charges. Even if it recognised those losses up front, it has enough capital.

Moreover, offloading €50bn of risk-weighted assets would eventually release almost €7bn of capital, assuming equity is equally distributed across the business.

It's hard for outsiders to know what other horrors lurk in Deutsche's €1.4trn balance sheet. Cuts will further dent morale at the investment bank, making it harder to retain staff. Wholesale lenders would take a dim view of Deutsche once again failing to meet its lowball target of a 4pc return on tangible equity, pushing up its borrowing costs. An economic downturn would push up bad-debt charges. Ongoing investigations in the United States and Germany may lead to new fines.

But shares valued at just 0.2 times Deutsche's tangible equity attach no worth to the investment bank. The lender could make a 2.6pc return on tangible equity by 2020 based on the expected results of its retail banking and asset management divisions, according to a Breakingviews calculation using a 30pc tax rate. Assuming a 10pc cost of equity, those two businesses alone support the bank's current valuation.

If Sewing can safely and successfully shrink the investment bank, then it's time to buy Deutsche Bank shares.

Reuters Breakingviews

Irish Independent

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