LONDON (Reuters Breakingviews) - Christian Sewing can’t catch a break. The Deutsche Bank boss has seen the German lender’s market value shrivel to just 13 billion euros. Now he is preparing to take the axe to its underperforming investment bank. Rock-bottom expectations give him scope to spring a positive surprise.
At Deutsche’s annual general meeting last month, Sewing pledged “tough cutbacks” to reinvigorate profitability. The bank’s equities and fixed income trading businesses, particularly in the United States, are prime targets. Deutsche may earmark risk-weighted assets worth 50 billion euros – about a fifth of the investment bank’s total – to be wound down or sold, the Financial Times reported.
The question is how much this would cost. A big restructuring charge would push the bank into the red again, dragging its common equity Tier 1 capital ratio below the bank’s 13% target and forcing Sewing to raise more capital.
It may not come to that, though. When rival Credit Suisse restructured its investment bank between 2015 and 2018, estimated losses were about 4% of the assets it offloaded. A similar ratio at Deutsche Bank would mean 2 billion euros of charges. Even if it recognised those losses up front, it has enough capital. Moreover, offloading 50 billion euros of risk-weighted assets would eventually release almost 7 billion euros of capital, assuming equity is equally distributed across the business.
It’s hard for outsiders to know what other horrors lurk in Deutsche’s 1.4 trillion euro balance sheet. Cuts will further dent morale at the investment bank, making it harder to retain staff. Wholesale lenders would take a dim view of Deutsche once again failing to meet its lowball target of a 4% return on tangible equity, pushing up its borrowing costs. An economic downturn would push up bad-debt charges. Ongoing investigations in the United States and Germany may lead to new fines.
But shares valued at just 0.2 times Deutsche’s tangible equity attach no worth to the investment bank. The lender could make a 2.6 percent return on tangible equity by 2020 based on the expected results of its retail banking and asset management divisions, according to a Breakingviews calculation using a 30 percent tax rate. Assuming a 10 percent cost of equity, those two businesses alone support the bank’s current valuation. If Sewing can safely and successfully shrink the investment bank, then it’s time to buy Deutsche Bank shares.
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