July 25, 2018 / 10:28 AM / 3 months ago

Breakingviews - Deutsche Bank will struggle even to hurdle low bar

LONDON (Reuters Breakingviews) - Deutsche Bank’s actual second-quarter numbers are a reminder that it has a semi-permanent residency in the doghouse. Chief Executive Christian Sewing’s surprise July 16 pre-release of the German bank’s numbers briefly gave the impression of a halt to its decay. The difficulty Deutsche Bank will face in hitting even its lowball 4 percent return on tangible equity by the end of next year is a reality check.

A statue is pictured next to the logo of Germany's Deutsche Bank in Frankfurt, Germany September 30, 2016

Sewing’s pre-release was because quarter results were better than feared. But quarterly pre-tax profit still fell by 13 percent year-on-year. Deutsche Bank’s already risible annualised return on tangible equity slipped by half a percentage point to 2.7 percent year-on-year.

Worryingly, the biggest drop occurred in the investment bank, where Deutsche Bank’s fixed income and equity trading revenue fell by 17 percent and 6 percent respectively, compared with quarterly increases enjoyed by peers on Wall Street. The underperformance is unsurprising given Deutsche Bank has been firing traders. Nevertheless, it sits uneasily with Sewing’s aspiration to remain a top four global trading house by revenue.

In response, Sewing is squeezing his only available lever: costs. The bank is on track to meet its annual 23 billion euros cost base goal, with another billion euros in savings earmarked for next year. Even then he needs the top-line to stabilise, according to a Breakingviews calculation.

Suppose Sewing hits his 22 billion euros adjusted cost base goal by the end of 2019. To achieve a 4 percent return annual revenue needs to flatline at 26 billion euros, assuming roughly 700 million euros in projected loan losses, a 30 percent tax rate and a similar tangible book value as today. That looks like a big ask given annual revenue dropped by 21 percent between 2015-2017, even without the deeper cost cuts which Sewing wants.

Thus far, shareholders are giving Sewing the benefit of the doubt. After shares rose by 13 percent in the past month, far outperforming the EURO STOXX Banks index, Deutsche Bank is valued at 0.4 times tangible book, implying the bank could hit its return target. Even with that discount, there remains room for disappointment.

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