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Morningstar | We Are Relaunching Coverage of Deutsche Bank After the Release of Its New Restructuring Plan

Deutsche Bank announced another, bigger, and bolder strategic plan which will see the bank exit its global equities sales and trading business, scale back part of its fixed income trading, and reduce its workforce by about 18,000 people by 2022. In the process it will shed EUR 288 billion in leverage exposure and a corresponding EUR 74 billion in risk-weighted assets. The new Deutsche Bank will refocus its efforts around its corporate bank in tandem with the remaining investment banking business, its private bank including its retail and wealth management businesses, as well as its asset management offering.Although this plan looks oddly familiar to previous strategic realignments, we think the most important piece here is the hard cut in the investment bank. While previous plans had also targeted a shrinking investment bank, the resulting declining revenues had been outpacing cost-cutting efforts pushing the bank into a downward spiral. The long tussle between ambitions of being a global top-tier investment bank and a strong regional private and corporate bank seem to have been decided for the latter now.The restructuring targets look ambitious. With the capital release unit excluded, the remaining bank, or core bank, still only posted returns on tangible equity of 1.7% in 2018 compared with a targeted return of 8% in 2022. We are cautious on Deutsche’s plan to reduce adjusted costs of the core bank by EUR 2.8 billion in three years while also targeting a 2% revenue CAGR. Additionally, the restructuring is currently costed at about EUR 7.4 billion which Deutsche plans to cover by releasing capital in its noncore unit. Following Deutsche’s current run-down schedule of this unit, it would set free about EUR 5.3 billion in capital. For the remainder or potential additional costs down the line management would either need to accelerate the capital release effort or rely on internally generated capital, which is scarce at the moment. Execution will be paramount in the coming years with little leeway for missteps along the way.