Deutsche Bank finally announced details on its “Strategy 2020” reorganization in its earnings call on Thursday of this week, but many financial industry analysts were not impressed, saying the reorg is taking some steps in the right direction, but the bank clearly still has a long row to hoe to get back on its feet again.
The megabank said it would shrink its workforce by around 9,000 full-time jobs by 2020 and shutter operations in at least 10 countries.
Moreover, an additional 6,000 external contractors will be let go by 2020. The bank also plans to dispose of assets with a total cost base of approximately 4 billion euros and another 20,000 jobs within the next two years (including its Postbank retail bank).
Deutsche Bank will cease operations in Argentina, Chile, Mexico, Uruguay, Peru, Denmark, Finland, Norway, Malta and New Zealand. CEO John Cryan told the media at the call that Germany would continue to be the firm’s most important market.
In a surprise, DB announced it plans to reduce the total number of clients it has in its global markets and investment banking business by close to 50%. In describing the primary goals of its new strategy, the bank said it will focus on the markets, products, and clients where it is positioned to succeed.
Deutsche Bank 3Q results in line with guidance
Deutsche Bank reported a net loss of 6 billion euros ($6.56 billion) for the third quarter, just under the 6.2 billion euros it had previously guided amid continued litigation and impairment charges.
CEO John Cryan noted profit and revenue were hurt by a series of charges totaling 7.6 billion euros announced earlier this month. The report also highlighted that the bank’s litigation reserves increased by 1 billion euros to 4.8 billion euros.
Industry analysts weigh in on Deutsche Bank’s “Strategy 2020”
Jernej Omahen and team at Goldman Sachs were not overly impressed by the reorganization plans announced by DB on Thursday. They note: “All in, we see the announcements as largely neutral, and expect the market to press management for more detail at the 16:00 GMT call. We make the following points: (1) bar a cyclical revenue upswing, it remains unclear to us how a greater than 10% ROTE target can be achieved; (2) even assuming that a road map to a 10% ROTE is detailed later today, the period of 2015-17 will remain difficult, with litigation and restructuring weighing on TBVPS formation; and (3) 2018E is as the first “post restructuring year”.
Societe Generale’s Andrew Lim and colleagues are also less than sanguine: “Deutsche Bank management today disclosed more detail on its Strategy 2020 plan under new co-CEO John Cryan. While this is welcome, the bottom line is that there is little which is incrementally positive to drive the stock higher in our view. In fact, there are negatives which should prompt profit taking after a c.16% run in the share price from September lows.”
UBS analysts Daniele Brupbacher and Mate Nemes have a somewhat more positive take: “We believe the “Strategy 2020″ targets announced in Spring 2015 implied RWA of EUR>500bn. The new EUR>420bn level is materially lower (and the reason for the higher CET 1 ratio target). We think the P&L and ROTE targets are similar but those now use less RWA (which helps to increase CET 1 ratios). During the investor day later today we therefore intend to focus on how Deutsche can achieve this more efficient and higher-velocity balance sheet. As a rough guide, we think the new targets could imply a net profit 2018E of up to EUR6bn (EPS EUR>4). UBSe/consensus are cEUR5.3bn.”
JPMorgan analysts opine:
Assuming loan loss provisions in line with JPMe in 2018, our back of the envelope calculation would imply Net Income of €5.9bn-6bn (EPS €4.1 implied), i.e. on this sensitivity the stock is trading at 6x P/E for RoNAV of 10% (in line with mgm’t target 10%+) and P/NAV 0.6x in 2018E which we see as very attractive for a well capitalised bank with a Basel 3 CET1 ratio target of 12.5%+ in 2018 and leverage ratio target of 4.5%+. We think DB today reported solid numbers relative to global IB peers, especially in its core Tier I FICC franchise, share count concerns are off the table, and although net cost savings are not aggressive enough, in our view, little is discounted at current valuation, in our view, and mgm’t is leaving room for upgrade potential.
