John Cryan, co-chief executive officer of Deutsche Bank.

Photographer: Jasper Juinen

Shrinking Plan No Tonic for Deutsche Bank Investors

Edward Evans is a managing editor with Bloomberg Gadfly. He is former managing editor for European finance at Bloomberg News.
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So much for a fresh start at Deutsche Bank. John Cryan's big strategic plan to fix continental Europe's biggest bank is the same as his predecessor's, but with more details. And it offers scant rewards to shareholders.

The financial targets Cryan set out today don't look especially appealing. Costs will still eat up 70 percent of income by 2018 and 65 percent in 2020. At fellow-struggler Barclays, the figure is 69 percent today.

In three years' time, Deutsche Bank hopes to have a return on tangible equity of more than 10 percent. That's better than the 44 percent loss on equity in the third quarter -- but still short of what UBS and Credit Suisse are already delivering, according to data compiled by Bloomberg. And there was precious little detail on how Deutsche Bank will get there. Cryan can only cut so far. He hasn't yet shown investors how he's going to increase revenue.

Instead, Cryan said he will eliminate 26,000 jobs, close Deutsche Bank's operations in 10 countries and dump about half the firm's corporate and investment banking clients because they aren't profitable enough. There's nothing surprising in that: almost every bank has been cutting jobs, pulling out of countries and pledging to weed out unprofitable customers since the 2008 financial crisis.

His plan has at least two big risks. First, that he can stem future litigation costs. He needs to. Deutsche today set aside a further 1.2 billion euros ($1.3 billion) for future litigation claims as it posted a 6 billion-euro third-quarter loss. But Barclays, still grappling with the costs of the scandals ranging from interest-rate to currency manipulation, shows how difficult it is for banks to shake off those past legal issues. It's a process that lasts years, however many times senior managers promise to overhaul conduct.

Second, a big part of Cryan's program involves overhauling Deutsche Bank's antiquated IT systems to help save 800 million euros. This is a big execution risk, and an area where bankers don't have a stellar record. It's hard enough to run a European bank right now without a complex IT project thrown into the mix.

Today's announcement shows the scale of Cryan's challenge. The stock trades at a 40 percent discount to tangible book value. UBS, his former employer, trades at a 66 percent premium. As finance chief, Cryan laid the groundwork for much of UBS's revival, but it was the bank's later exit of much of its fixed income business that cemented that growth. He needs to show that kind of imagination at Deutsche Bank.

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

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