Deutsche Bank's Deck-Clearing Won’t Fix Malaise: Edward Evansby
John Cryan’s effort to clear the decks at Deutsche Bank looks dramatic but provides few answers about how he plans to solve its biggest problems: feeble profitability and inadequate capital. And while the former is a long-term dilemma, he may well have missed his window of opportunity to fix the latter.
The bank said last night it would take a 6.2 billion-euro ($7 billion) quarterly loss, a 5.8 billion-euro writedown and indicated it may scrap a dividend that’s been around since Germany’s postwar reconstruction in the 1950s.
These mark a start for the new CEO, but in truth Cryan had little room for maneuver. Regulators have forced his hand: the writedown in the value of Deutsche Bank’s 20 percent stake in China’s Huaxia and the cut in the dividend are both responses to regulators’ demands for banks to bolster capital. Anshu Jain, Cryan’s predecessor, would in all likelihood have had to do the same if he’d stayed in charge.
Cryan didn’t take the biggest choice open to him: to raise capital. Since taking over three months ago, he’s ruled out tapping shareholders. His hesitancy is understandable given the shares trade at slightly less than 60 percent of their tangible book value and any equity offering would dilute existing holders. But a fundraising is necessary to restore investor confidence.
Even after stopping the dividend, the bank’s core capital ratio will be 11 percent -- not enough. Any unexpected increases in litigation costs will eat into that and force Cryan to come back to shareholders. By then, investors will be asking why he didn’t act sooner.
Today’s announcement also does little to address the underlying problem of profitability. At a little over 2 percent, Deutsche Bank has one of the lowest returns on equity of any of Europe’s biggest investment banks, according to data compiled by Bloomberg Intelligence.
It’s hard to see what the bank can do to address that. Fixed income isn’t going to be the profit-gusher it once was and Deutsche’s exiting the biggest part of its consumer banking operation. Regulators are unlikely to let him expand out of trouble by, for instance, acquiring a wealth manager, and Germany’s political establishment is unlikely to let Deutsche Bank be acquired. (The clue’s in the name.)
Cryan cannot be looking forward to October 29, when he’s due to detail exactly how he will overhaul the bank. More job cuts and asset reductions are likely but probably won’t be enough.
The shares trade at 7.2 times estimated 2016 earnings, the lowest in the 44-member Bloomberg Europe Banks and Financial Services Index. That may be temptingly cheap, but this turnaround will be difficult and long, and -- as of this moment -- there’s still not a convincing case for its success.