Deutsche Bank ‘Baby Steps’ Overhaul Disappoints Investors

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Deutsche Bank Revamp: Will It Work?

After six months of review and three statements in four days, Deutsche Bank AG laid out a new strategy Monday that underwhelmed investors.

The plan, which calls for Germany’s largest lender to sell part of its consumer operation and shrink the investment bank, sent shares down the most in 15 months on Monday. Investors criticized the lower profitability target and lack of detail and questioned whether Co-Chief Executive Officers Anshu Jain and Juergen Fitschen, who have missed their goals for the past three years, will be able to deliver.

“It’s not really pioneering news,” said Lutz Roehmeyer, who manages about $1.1 billion at Landesbank Berlin Investment, which holds Deutsche Bank shares. “It’s a general change of strategy toward investment banking, but only in baby steps. Compared to what they’re planning now, I wish they would have done nothing.”

The Frankfurt-based bank, under pressure to boost returns, said it wants to “remain universal” while no longer being all things to all people. Its solution: to pursue a “client-centric business model,” which it says is “unique to Deutsche Bank.”

‘Core DNA’

That means cutting costs by an additional 3.5 billion euros ($3.8 billion), reducing leverage at its investment bank by 150 billion euros and selling a majority stake in its Postbank consumer unit. Executives stopped short of a more radical overhaul that would have seen a complete exit from consumer banking after that option didn’t win backing from the board, according to people with knowledge of the discussions who asked not to be identified because the talks were private.

Jain, 52, said the plan marks an effort to rebalance the lender’s business mix and bolster capital.

“I’m aware of the fact that there was quite a lot of speculation that we might have done something even grander, even more radical,” Jain said in a Bloomberg Television interview. “It really became a case of not altering the core DNA -- but doing a lot, which is what the strategy is, in order to allow us to survive and cover our clients well.”

Deutsche Bank decided not to dispose of its entire consumer-banking business after stress tests by the European Central Bank concluded a company composed purely of an investment bank and corporate lender may not be strong enough to weather a severe financial crisis, Reuters reported, citing unidentified people familiar with the process.

“The ECB denies rejecting any of Deutsche Bank’s proposed business models,” it said in a statement. Deutsche Bank said it’s “inaccurate to report that the Bank chose a plan based on stress test results.”

Profitability Target

Investors said the lower target for profitability announced Monday wasn’t stretching enough and voiced concern that the lender didn’t give enough detail about how it will achieve cost cuts. Deutsche Bank said it will provide more information over the next 90 days.

The bank will now target a return on tangible equity of 10 percent by 2020 -- less than the 12 percent return on equity it had planned for 2016. In the first quarter, return on equity stood at 3.1 percent.

“To me, 10 percent return on equity as a target is probably below cost of equity,” said Christian Sole, an analyst in Brussels at Candriam Investors Group, which oversees about 90 billion euros in assets and doesn’t hold Deutsche Bank shares. “Clearly, this isn’t an investable company for us.”

Deutsche Bank shares fell 4 percent to 28.93 euros at 3:48 p.m. in Frankfurt trading after dropping 4.6 percent Monday, paring this year’s gain to about 16 percent. The shares have underperformed all of the biggest global investment banks since Jain and Fitschen took over three years ago.

‘Very Cheap’

Deutsche Bank stock is “very cheap,” Jefferies LLC analysts led by Omar Fall said in a note Tuesday, recommending investors buy shares. The stock trades at a 30 percent discount to tangible book value, compared with the Bloomberg Europe Banks and Financial Services Index’s 20 percent premium.

The company’s plan puts the “leverage debate to bed,” Fall said adding that he expects the company to meet its new profitability target next year already as earnings at the investment bank recover.

The bank said it plans to increase its leverage ratio of equity to assets to 5 percent from 3.4 percent at the end of March. Still, some investors were irked that Deutsche Bank’s capital plans didn’t include a higher ratio of equity to assets weighted according to their risks. The lender is targeting a common equity ratio of about 11 percent in the medium term, down from 11.7 percent at the end of 2014.

“They’re taking more risk and lowering the return,” said Roehmeyer. “That can’t please an investor.”

‘Incomprehensible’ Strategy

Others criticized the bank for reversing an acquisition it completed only three years ago. The lender spent more than 6 billion euros buying a 94 percent stake in Postbank and millions more integrating the consumer-banking operation.

“Deutsche Bank went through great pains to integrate Postbank, and at the end they sell it,” said Boris Boehm, who helps manage 2.4 billion euros including Deutsche Bank shares at Aramea Asset Management AG in Hamburg. “This is incomprehensible,” he said. “The high volatility in Deutsche Bank’s strategy is disorienting investors.”

Kian Abouhossein, a London-based analyst at JPMorgan Chase & Co., questioned whether Deutsche Bank can find an additional 3.5 billion euros in cost cuts to meet its goals.

“If I look at your historic cost-savings plan, you don’t really see that very well in the numbers,” Abouhossein said on a conference call with the bank on Monday. “How are you going to make sure that these targets that you set today will actually be achieved? Five years is a long time to achieve those.”

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