On 11 September Deutsche Bank (DB) held an investor day where results of its strategic review were released (marking the first 100 days of co-CEOs Jurgen Fitschen and Anshu Jain at DB). The review outlines what is likely to be the biggest restructure at this bank in nearly a decade. The outcomes are generally credit positive (noting at this stage they are only promises), with the most notable including DBs heavy cost cutting targets and its intention to diversify its business away from investment banking.
The bank highlighted its strengths and weaknesses which are broadly in-line with many market commentators including FIIG’s assessment.
Strengths
- Strong home market economy in Germany
- Growing emerging markets business
- Leading position in investment banking
- A strong funding structure
- Proven risk management capability
Weaknesses
- Low levels of capital
- A high cost base
- A high preponderance to volatile capital markets activities
- The long-term underperformance of some of its businesses (i.e. asset and wealth management)
Main points
- Banking model: DB committed itself to the universal banking model. The GFC highlighted that capital markets /investment banking activities are highly cyclical and volatile. DB therefore will seek greater diversification away from such activities. DBs majority acquisition of Deutsche Postbank (a retail bank with significant deposits) in 2010 was the first major step towards this
- Business structure: DB will split its two main business divisions (Corporate and Institutional Banking & Private Client and Asset Management) into four: Private & Business Clients, Corporate Banking & Securities, Asset & Wealth Management and Global Transaction Banking
- Non-core run-off: A fifth new division will be established, Non-Core Operations, which will combine assets with typically high capital requirements and businesses no longer being undertaken. Non-Core will have risk-weighted assets (RWA) of around €135bn which will be run off or sold at a targeted reduction of €45bn by 31 March 2013, €55bn by end-2013 and a further €15-20bn per year after that
- Capital: The bank acknowledges that compared to peers its capital position is weak. However unlike other banks it will seek to build capital organically (through retained earnings and RWA reduction), rather than through an equity raising. DB had a Basel III core Tier 1 ratio of roughly 6.5% 1H12 and has reaffirmed its target of 7.2% by 1 January 2013, at least 8% by 31 March 2013 and over 10% by end-2015
- Cost reduction: DB increased its previous €3bn annual cost reduction target to €4.5bn (by 2015). This is aggressive and amounts to about 17% of the Group's 1H12 annualised costs of €27bn. Most of the cost reduction will be achieved through job losses however there will be other savings, including property sales
- Profitability: DB reduced its pre-tax ROE target to 17.5% (12% post-tax) from 25% - mainly due to the move to Basel III
- Compensation: DB acknowledges that the previous remuneration culture, especially in investment banking, was “unsustainable and unacceptable”. The bank will phase in over time various measures to address this
Conclusion
This represents a significant change of direction for DB. Such change can be seen across the banking sector and goes much further than the usual cyclical reposes to a banking crisis. The background of low economic growth, ongoing deleveraging, increasing competition and more regulation is driving fundamental change. While at this stage it is just promises, the strategy is broadly credit positive and if followed will mark the start of fundamental change for the bank.