A Cryan Shame

Deutsche Bank Is Fine, Apart From the Bank Bit

There's little sign of John Cryan's much-promised turnaround.
Photographer: Andreas Arnold/Bloomberg

The best news Deutsche Bank CEO John Cryan had for shareholders on Friday is that, if you take out the whole banking part, there’s a really good business there.

Deutsche Bank’s asset-management business, which accounts for about one-tenth of the company’s revenue, was the only unit to report a return on equity of more than 2 percent for 2017. Across the firm, Deutsche Bank’s overall return on tangible equity last year was negative. Considering the industry's cost of capital is about 10 percent, that's bleak.

Standout Business

Deutsche Bank's return on equity by division

Source: company filings

Note: data refer to FY 2017

While Cryan is probably right to try and unlock value from the asset management business, most likely through a partial IPO, it’s still more or less a sideshow to the fact that this is a bank in search of a viable business model.

Cryan has raised capital and cut costs, but has neither improved revenue nor delivered structurally acceptable profit. Expenses ate up about 93 percent of revenue last year. Little wonder Deutsche Bank shares have lagged their peers over the past year.

Behind the Pack

Deutsche Bank shares have underperformed their peers over the past 12 months

Source: Bloomberg

Diagnosing the problem is easy: Deutsche Bank derives most of its income from investment banking, and, within that, most of its revenue from fixed-income and equity trading. Both fell by around 25 percent in the fourth quarter.

To be sure, this is a market in which everyone has struggled at a time of ultra-low volatility and interest rates, with even big U.S. banks posting double-digit trading declines in the fourth quarter.

But despite Cryan’s reassuring words to analysts and the bank’s more robust balance sheet, Deutsche appears to be losing market share to rivals. There’s little sign of a rebound, and there’s nowhere to hide, either: Only Goldman Sachs Group Inc. depends more on investment banking for its revenue, according to Morgan Stanley research.

There are no quick fixes for these problems without self-harm. There was plenty of talk on Friday of IT simplification, automation and cost cuts to come -- but this all takes time and requires investment to boot. In the meantime, bonuses are creeping back toward “normalized” levels, and expenses are going to be higher than expected in 2018.

Deutsche Discount

The lender's shares trade at a steep discount to book value

Source: Bloomberg Intelligence

Investors are getting impatient with Cryan. Deutsche Bank’s already-steep discount to book value still has room to widen further if signs of a January rebound fail to come through. Cryan is hinting that he will find ways to rev up the restructuring. He'll need to find them, and fast.

What else can be done? If this were the auto industry, a bright spark might suggest a merger. But Deutsche Bank’s risk-adjusted balance sheet is in the hundreds of billions of euros, its problems run deep, and it is kept on a tight leash by regulators.

Perhaps, in a year or two, with interest rates, economic activity and volatility back to more normal levels in the euro zone, Deutsche might find a marriage partner -- maybe even Commerzbank AG, if it hasn't been snapped up by someone else. But without a meaningful change in the market environment, it will be a long limp to the finish line. Until then, shareholders had better hope those asset managers keep performing.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lionel Laurent in London at llaurent2@bloomberg.net

    To contact the editor responsible for this story:
    Edward Evans at eevans3@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.