Breakingviews - Deutsche Bank retreat depends on uber optimism

The financial district with the headquarters of Germany's largest business bank, Deutsche Bank , is photographed on early evening in Frankfurt, Germany, January 29, 2019.

LONDON (Reuters Breakingviews) - Any cocksure child knows that owning up to mistakes is part of growing up. By that metric, Deutsche Bank is just beginning to mature. Boss Christian Sewing on Sunday effectively called time on the lender’s multi-decade attempt to create a global investment bank with a swingeing plan to shrink its trading unit and put 288 billion euros of assets into runoff. But the retreat depends on friendly markets and an absence of blunders.

Germany’s biggest bank by assets is admitting what investors had long guessed: its target for a return on tangible equity of 4% in 2019 was a mirage and its profit-munching investment bank needs deeper restructuring. To effect the latter, Sewing plans to shut down equities trading entirely and downsize Deutsche’s rates and fixed income businesses. The slimmer bank would have total adjusted expenses of 17 billion euros by 2022 - down from 23.5 billion euros last year - and a 70% cost-to-income ratio. That implies revenue of more than 24 billion euros, or just 1 billion euros less than in 2018.

Such relative self-assurance was breezily backed up with reference to the “high quality and low risk nature” of the assets Deutsche is shedding. That begs the question of why those assets are surplus to requirements. Regulators are easing the transition to what should be a less risky institution: Deutsche is lowering its minimum common equity Tier 1 capital ratio to 12.5%, 50 basis points lower than before.

Even so, the plan depends on some rosy assumptions. Equities sales and trading brought in nearly 2 billion euros of revenue last year. Fixed income trading accounted for 5.3 billion euros. Deutsche believes resurgent corporate, advisory and asset management divisions will help partly make up for a projected 2.5 billion euros in lost income. But the fact that annual revenue in those businesses actually shrunk year-on-year in 2018 does not bode well. The bank is also projecting minimal charges on the assets it wants to exit. An economic downturn, or another round of regulatory fines, could similarly knock it off course.

With a market capitalisation equivalent to just a quarter of the bank’s tangible book value, Sewing understandably wants beleaguered investors to look towards the long term. But until his bright assumptions are proven correct, Deutsche’s passage to maturity will remain a work in progress.


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