Deutsche Bank [DBK] CEO Christian Sewing (pictured above) shocked financial markets when he announced one of the most radical strategic overhauls since the financial crisis at the start of July, with the bank’s share price just 7% off all-time lows.
Since then, the bank has been refocusing its efforts away from Wall Street and instead on its historic roots of financing German and European corporate clients and domestic retail banking.
As part of the transformation, the lender has been closing a slew of trading units, culling 18,000 jobs – half of which are planned across its German operations, Bloomberg reports – and selling off €74bn in assets; the results of which are expected to become clear when it reports its Q3 results later this month.
Investors will also be eager to see if Deutsche Bank’s new head of retail Manfred Knof managed to fulfil his commitments in rejuvenating revenue across the lender’s retail operations, and making annual cost savings of €1.4bn.
The performance targets set for the German lender’s retail business will play an important part in determining the overall success of the transformation, according to the Financial Times who spoke to one of the architects of Sewing’s restructuring plan.
Valuation of assets being sold
Deutsche’s retail business is under a lot of pressure to deliver about a quarter of the total cost-cutting demanded by Sewing, as the cost-income ratio in the lender’s private and commercial banks hit 95% in the first half of 2019. It employs 28,000 people in Germany and accounts for about a third of the bank’s total revenue.
“You cannot imagine the amount of internal red tape — meetings, reporting, accounting — that is created by this,” a personal familiar with the matter told the Financial Times, adding that “for years, the bank excelled at coming up with 10 different reasons to keep an inefficiency in place. [Mr Knof's] task is to end this.”
European banks under pressure
The bank’s transformation comes at a time when the broader backdrop for German banks is deteriorating.
Fears of slowing economic growth, negative rates and geopolitical uncertainty in Italy and the UK have sparked recession fears and as a result, have weighed down the Stoxx Europe banks index in August to a low not seen since 2016.
While Bank of America Merrill Lynch strategists predict that this downtrend will let up over the next six months, no signs of that have yet been seen as the index is down 5.30% in October thus far.
The bank’s stock, meanwhile, has been falling ever since the announcement and is down 11.89% year-to-date. It currently trades 35.58% off its 52-week high of €9.78 and has a 50-day moving average of €6.85.
|Return on Equity (TTM)||-4.67%|
|Quarterly Revenue Growth (YoY)||-7.00%|
Deutsche Bank share price vitals, Yahoo Finance, 09 October 2019
Deutsche has a consensus sell rating among 22 analysts on CNN, which has held steady since September, with an average target of €6.90, representing an 8.84% drop from current levels.
The negative sentiment towards the stock reflects investors’ concerns surrounding the costs associated with the restructuring. The bank has already felt the backlash, as it reported a net loss of €3.1bn in Q2 2019 as a result of charges stemming from the strategic pivot, which amounted to €3.4bn.