Deutsche Bank’s Delivery on Cost Target Questioned by Autonomous

Deutsche Bank AG, which last week presented its new strategy to boost profitability, may struggle to meet its cost-cutting goal while losing its competitive advantage in investment banking, according to Autonomous Research LLP analyst Stuart Graham.

“We regard the 2020 targets as plausible, but heavily reliant on cost cutting,” Graham, who has been following Deutsche Bank for almost two decades, wrote in a May 5 note to clients. “Deutsche’s track record is very poor on costs, and we are skeptical the leopard can change its spots.”

Deutsche Bank last week said it plans to make additional annual cost cuts of 3.5 billion euros ($4 billion) by 2020, sell its Postbank consumer-banking unit and shrink the securities business to boost return on tangible equity to at least 10 percent in the medium term from 3.9 percent in the first quarter. The company hasn’t yet provided details of how it will achieve the cost savings.

“Deutsche has been actively attacking its cost base since at least 2001,” wrote Graham, who has an underperform rating on the shares. “In that time period, it has booked around 9 billion euros of cumulative restructuring charges, yet its cost-to-income ratio has remained stubbornly high.”

The bank seeks to cut leverage by as much as 150 billion euros at the investment bank and lower the group ratio of costs to revenue to about 65 percent from 87 percent in 2014. Once the cost-to-revenue target is met, the company’s return on tangible equity may rise to 9.7 percent in 2020, according to Graham’s estimates. Achieving half of planned cost savings would leave the return at 8.3 percent, according to Graham.

“Even if Deutsche achieves its 2020 targets, a 10 percent return on tangible equity is simply not that exciting,” he wrote. “Following the deconsolidation of Postbank, Deutsche will become more reliant on the profitability of the investment bank. Yet, having surrendered its long-standing key competitive advantage of high leverage, we are left wondering what will distinguish Deutsche’s investment bank in the future.”

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