The last few years for Deutsche Bank have been torrid ones for Germany’s biggest bank, as it has lurched from one crisis to the next. Earlier this year the Deutsche Bank’s share price hit an all-time low of €5.80 as markets lost confidence in the banks’ ability to turn itself around.
Deutsche Bank merger
In March this year the bank was, not for the first time, at the centre of potential merger chatter with Commerzbank, another struggling German bank which is still dealing with its own legacy of difficulties caused by the fallout from the financial crisis, and which saw the German government take a 15% stake.
Coming against a backdrop of continued financial scandals, that saw German police raiding the banks Frankfurt head office earlier this year, Deutsche Bank management have spent the last few years doing a pretty good impression of Emperor Nero, fiddling while the bank continues to burn through cash.
Deutsche Bank job cuts
In 2015 the bank booked a €6.8bn loss while also announcing a plan to cut over 20k jobs by 2020, and announcing its withdrawal from 10 countries. At the same time it was announced that Postbank would be split off in an effort to draw a line under the vast sums of money being thrown at it since 2010 when Deutsche originally acquired it.
Since then Deutsche Bank’s share price has struggled to make any inroads into the fulfilling the goals of the original strategic review outlined in 2015, while earlier this month CEO Christian Sewing outlined managements latest grand scheme to turn the business around.
The announcement of a €50bn bad bank is certainly a start in its overhaul of its trading operations as it looks to curtail or close its trading businesses outside of continental Europe, however for a bank that has €1.4trn of assets the €50bn number does seem a rather low number for a bank that investors appear to have lost faith in.
As far as Postbank is concerned various management regimes have procrastinated over what to do with a bank that is barely profitable, and is only now being integrated fully into the existing business model, after management changed their minds yet again on what to do with a bank that has wafer thin margins and operates in a negative rate environment.
In addition to the €50bn bad bank, Sewing also announced that the bank would be cutting a further 18k jobs on top of the 10k jobs that have gone since the end of 2015. This number alone highlights how timid Deutsche has been when it comes to cutting back on what is its biggest overhead, namely headcount.
At the end of 2015 Deutsche Bank had 101k employees worldwide and at the end of last year had just under 92k, showing that for all the talk in 2015 of cutting costs, the actual scalpel became rather blunt.
This month’s announcement of 18k job losses is a start and while unwelcome and particularly poorly handled for the employees concerned, it’s a start for the radical surgery which has been needed for some time now. The cuts would take the global headcount down to 74k, however when you compare it to Royal Bank of Scotland and the downsizing there since 2008 it still only accounts for 25% of the global work force since 2015. In contrast RBS has seen its workforce shrink from over 200k in 2008 to 67k now.
Deutsche Bank restructuring plans
This week’s latest update is likely to shine a light on how much this exercise is likely to cost Deutsche in the short term with management looking to shave billions of euros off its cost base, while at the same time investing sizeable sums in updating the banks technology.
Deutsche’s biggest problem now is how it intends to make money going forward, as it looks to move into the wealth management space, which is already occupied by Credit Suisse and UBS.
Deutsche’s DWS arm already has a limited presence here already, and is one of the better performing areas but it still lags behind the two Swiss giants who embarked on their own surgery plans back in 2015/16.
Today’s latest Q2 numbers from UBS highlight the problems Deutsche Bank is likely to face. UBS wealth management division saw its profits miss estimates on a decline of $75m in net income as increased competition drove down revenues from wealthy clients. This situation isn’t likely to get any better, as more banks chase a finite number of clients. It’s also a trend that has been noticeable in other banks earnings announcements in this quarter.
Deutsche also has the not insignificant problem of operating in a negative interest rate environment, a problem that it has been wrestling with since 2015, and which is likely to get even worse if and when the European Central Bank eases policy further later this year.
In April the bank cut its revenue target for 2019 saying it expects “essentially flat” full year revenues.
In Q1, net income was €201m, a 67% increase from a year ago, however total revenue fell to €6.35bn with the weakness falling across most areas of the franchise. There were declines of 13% in investment banking, and 18% in equities and 19% in fixed income.
Since this month’s announcement of job losses and restructuring, Deutsche bank’s’s initial share price pop has dissipated which means any disappointment from this week’s announcement and guidance could well see further weakness in the share price.
Update: The results are out. Read our analysis on the figures and the early impact on the Deutche Bank share price.