Christian Sewing had been urged to come up with a radical restructuring plan for Deutsche Bank — and he has. Barely a decade after it claimed the title of world’s biggest bank, Deutsche has finally stopped with the muscle-flexing.
It has taken Mr Sewing 15 months as chief executive to get there. But on Sunday, after a crescendo of calls from shareholders, regulators and the commentariat, Deutsche unveiled a dramatic overhaul, centred on a wholesale withdrawal from the business of trading equities.
The question now is will it work? Will it stop the downward pressure on the share price that has seen Deutsche’s market value slip by a quarter during Mr Sewing’s 15 months in charge? And will it give the German bank a credible operating model for the future?
The market’s reaction over the past couple of weeks, as nuggets of the plan have emerged through the media, has been positive: the shares have rallied 20 per cent from their early June all-time low. Mr Sewing will have an eye on the performance of UBS, which saw its share price double over the three years after it announced a mirror image of Deutsche’s plan, all but closing down its fixed-income unit in 2012.
Despite Deutsche’s retreat from equities, it will continue to offer a corporate finance service in equity capital markets, issuing new stock for clients. But there will be no sales and trading operation for investors who want to buy and sell equities.
This business was never in the DNA of Deutsche, which had grown through the 1990s and 2000s as a fixed-income house. Equities had been added in part so it could claim to be a “full-service” bank and, more recently, to de-risk away from its core operation given the ever tougher post-crisis regulatory capital demands in fixed-income. Over the past couple of years, it had actually expanded the equities business.
Unfortunately, it was inescapably uneconomic — latterly Deutsche’s equities unit has been losing about €600m a year. Exiting has to be the right decision and Mr Sewing should be applauded for it.
Whether Deutsche can find a sustainable, healthy balance of business for the future is another question. The 2022 target of an 8 per cent return on tangible equity looks modest compared with rivals but is still ambitious given the headwinds.
The first challenge relates to that retreat from equities: can the remaining equities operation be credible without a secondary market trading operation? Few global competitors have such a model, presumably fearing a loss of business in equity capital markets. Rothschild and Lazard are notable exceptions. So is that Deutsche’s new identity? Is it to be a German boutique, with a bit of domestic retail banking tacked on?
That is part of the story. But the new heart of the group will be a corporate banking unit focused on servicing all the needs of company treasurers. Deutsche reckons it can increase its market share here, especially within corporate Europe.
The bank’s revenue projections, implying annual growth of up to 3 per cent, look ambitious given the risk of revenue attrition as clients leave on the grounds Deutsche is no longer that global full-service bank.
The other big headwind will be the operating environment. From here, it is only a matter of time before markets decline and economic growth dips, potentially hampering Deutsche in the middle of its three to four-year restructuring. But that is no reason not to try.
Mr Sewing will have in mind that UBS’s mirror-image rejig happened seven years ago, a reminder of how painfully slow Deutsche’s response has been to the changed regulatory and economic environment. At least he appears to be on the right track now.