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Morningstar | We Relaunch Coverage of Deutsche Bank; the New Restructuring Plan Looks Ambitious to Us

We are relaunching coverage of Deutsche Bank with a fair value estimate of EUR 9 per share and no-moat, stable trend rating. With a price/fair value of just below 0.8, shares trade in 4-star territory considering our very high uncertainty rating for Deutsche. Our no-moat rating is based on the high competition and low profitability in Germany, Deutsche’s home market, and the absence of intangibles or network effects in its investment bank as potential moat sources.

Deutsche’s new restructuring plan looks similar to previous attempts to reinvent the bank. The bank will shrink its investment bank, refocus on its corporate bank, cut costs and plans to try do everything a little better than before. We think the key takeaway is the significant cuts to its global investment bank. Previous attempts to shrink its investment bank resulted in revenues declining faster than cost savings materialized, pushing the bank into a downward spiral, chasing after profitability. Pulling the plug on its equity sales and trading operations indicates to us that the internal tussle between the seemingly incompatible ambitions of being a top-tier global investment bank and a strong European corporate bank have now been settled as the latter.

The plan also looks ambitious to us. Along with cutting its equity sales and trading business, reducing its rates trading, cutting about 18,000 employees and shrinking the balance sheet by about 23%, the bank plans to cut costs at a 4% CAGR until 2022 in its core operation. At the same time, it aspires to grow its revenues at 2% per year. We think this is unrealistic. Given management’s recent track record of delivering on cost targets, we model for adjusted costs to decline by about EUR 2 billion until 2022, compared with EUR 2.9 billion targeted by management. Our revenue assumption is virtually flat, however. We forecast a return on tangible equity of 4% versus management’s target of 8% in 2021.

The restructuring is costed at EUR 7.4 billion, with about EUR 5 billion incurred in 2019 alone. In order to pay for this, Deutsche plans to offload EUR 74 billion in risk-weighted assets in total over time and about EUR 49 billion until 2021. At a current common equity Tier-1 ratio of 13.6%, this translates into roughly EUR 5.3 billion. We believe management anticipates filling the gap between EUR 7.4 in capital needs and EUR 5.3 in capital relief with either increased profitability or an accelerated rundown of its restructuring unit. While management is confident it can do this, we remain wary. Bloating restructuring costs, missing revenue targets because of internal or external factors, nonmaterializing cost savings, and potential fines all pose significant risks to Deutsche’s capital position. In accordance with regulators, Deutsche plans to lower its common equity Tier-1 ratio to about 12.5% by 2021, releasing another EUR 3.7 billion in capital. However, this is likely to be offset with an anticipated risk-weighted asset inflation of about EUR 25 billion in the medium term.