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Two days after announcing the opening of the appropriately named Zig Zag London offices for its asset and wealth management arms, Deutsche Bank announced it is revamping its Strategy 2020, with some familiar elements.
So familiar, in fact, that one could be forgiven for thinking that Deutsche Bank is doomed to the Nietzschean nightmare of the eternal return, ever-fated to repeat the mistakes of the past without benefiting from lived experience.
Although shareholders have reacted poorly to the plan – wiping off some €500 million in market capitalization as of Thursday, compared to before the announcement – there are elements of it that should console those who fear that Deutsche is merely flailing helplessly in the void it will eventually descend into.
On Sunday, the bank announced it will seek to issue 687.5 million new shares, ditch the potential sale or IPO of Postbank and instead combine it into the private & commercial clients division (while keeping the brand name), float a minority stake in Deutsche Asset Management, sell off tens of billions in euros more of assets and – one year after separating it out – recombining its trading unit with the CIB, along with transaction banking and corporate finance.
It’s basically a restructuring of the bank’s strategy around the central fact that an IPO or sale of Postbank simply isn’t going to happen: an IPO wouldn’t raise enough money to keep shareholders happy, and a sale of the unit – valued deep below what Deutsche paid for it – at a loss would burn away too much capital.
Once management swallowed that pill, plans had to change.
There have been so many changes in strategy it would be easy to confuse the “2020” in Strategy 2020 with its ordinal sequence, rather than target date
However, the resulting strategy hasn’t appeased equity investors. By Tuesday, the bank’s share price was down 9.57% from the previous Friday’s close, to €17.28 – or a loss of more than €1 billion in market capitalization.
Markets were unconvinced, it seems, that the sudden realization that Postbank is actually worth keeping was a genuine eureka moment for management, though, to be fair, chief executive John Cryan said on the Sunday call with journalists that the plan had always been to sell Postbank only if it was capital accretive.
“We couldn’t afford to keep it and we couldn’t afford to sell it,” he added on the call.
And, while Strategy 2020 put a 2018 deadline on hitting a greater than 10% return on tangible equity (RoTE), the ‘new’ financial target simply says the bank wants merely to hit 10% in a “normalized operating environment”.
That target is the RoTE that, as a rule of thumb, covers cost of capital for an average bank. Deutsche is no average bank, as investors that have held on through recent extreme share-price volatility can attest.
There is also the question of whether Deutsche is raising enough capital with its new plan. Cryan said he thinks the €2 billion in proceeds the bank will reap from the flotation of a minor stake in Deutsche Asset Management is a low estimate, of course. Neither is it certain, unlike the underwritten capital raise.
Transparent logic
And, in any case by some estimates, in a bad scenario, the bank could have to raise billions more in capital to hit its minimum CET1 ratio under the ECB’s Supervisory Review and Evaluation Process – so how lowball of a figure is €2 billion, really?
But there are parts of the plan that make welcome, transparent logic.
Putting corporate financing, global markets and transaction banking under one (accounting) roof makes eminent sense. Splitting them up, as the bank did last year, made less, since the idea was to organize the groups “along client lines” – but traditional CIBs have markets divisions and banking divisions under the same roof because client sets overlap.
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John Cryan, |
Thus Cryan should not have been surprised to learn, as he noted on the Sunday call, that the bank had found that teams were duplicated between separate groups, and, frustratingly, that separating them had created gaps in coverage, since “we were engaging, from two different angles, the same client set.” This is basic stuff.
The flotation of a minority stake in Deutsche’s asset management arm, though sold on typically ambiguous terms such as “unleashing [its] growth potential”, should, besides being capital accretive, also help to align staffers’ compensation with performance – something that has been a problem at other bank-owned asset managers, since stock comprises part of performance, and bank stocks (especially Deutsche’s) have struggled in the years since the crisis.
Additionally, pulling Postbank into the fold could have as yet unmentioned benefits.
Deutsche has its own retail branches across Europe. Given appetite for acquisitions among banks might revive in a higher interest-rate environment — Deutsche could find itself with interesting opportunities to sell select retail branches to competitors, consolidating its focus in Germany, where it has a leg up over competitors such as Commerzbank due to its size.
Finally, if the bank can achieve a CET1 ratio of above 13%, it will make it one of the most well-capitalized banks of its peer group.
There have been so many changes in strategy it would be easy to confuse the “2020” in Strategy 2020 with its ordinal sequence, rather than target date, and that seems to be part of what equity investors have reacted against.
But this new strategy might actually represent the first time in a long time that Deutsche Bank will truly be able to focus on building capital, reducing leverage and becoming a bank that really is, as Berenberg analyst James Chappell put it in a recent client note, a “sum of its parts”.
That’s not a hugely ambitious target, but it’s a good start.