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The best thing about 2017 for Deutsche Bank was that it couldn’t possibly be as bad as 2016, when the bank was almost sunk by concerns over profitability, funding and capital that destabilized investor and customer confidence.
Worries over Deutsche’s ability to generate the earnings to service its additional tier-1 coupons at the start of that annus horribilis led to stock price falls, while fears at the end of the year over settlements with the US Department of Justice led some hedge fund customers to pull balances and other customers to do less business with the bank.
Last year brought much relief.
In 2017, Deutsche was able to negotiate a settlement with the DoJ half the size of the $14 billion the department had initially demanded. The German bank had no problem raising €8 billion of equity in a rights issue, boosting its common equity tier-1 ratio from 11.1% to 13.8%.
Progress may have looked slow to shareholders in 2017 – especially when compared with other large banks now passing from post-recovery to sustainable growth – but at least it was in the right direction.
Pre-tax net income for the first nine months of 2017 was €2.6 billion, up 64% on the first nine months of 2016. Return on equity was an unimpressive 4.1%, still far below the medium-term target of 10%, but markedly better than the 1.2% in the first three quarters of 2016.
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| John Cryan |
A kind description of 2017 at Deutsche is that it was a year of transition that at least holds out hope that chief executive John Cryan and his management team have a chance to get it firing again. It is tracking several years behind other banks that have already rebuilt their business portfolios and overhauled IT, but at least it is now taking decisive action.
In 2018, Deutsche Bank will merge the back offices of its German retail bank with that of Postbank, which it had previously intended to sell, in an effort to wring cost-efficiencies and higher revenues out of a business with 20 million customers in Europe’s strongest economy.
At first sight, retail banking in Germany might look a low return business, but it is also a very low risk one. Deutsche can only play the hand it has been dealt and needs to chase revenues and scale advantages in its home market.
“The private and commercial bank (PCB) business faces the drag of negative interest rates and needs to grow fee and commission income to off-set that. But there are positive aspects about being Germany’s biggest bank,” says James von Moltke, chief financial officer of Deutsche Bank. “For retail customers, we are now rolling out new digital offerings such as robo-advisory.”
He adds: “The return on equity for PCB in the first nine months [of 2017] was running at 7.3%, so not too far off our hurdle rate.”
The main problem for Deutsche in 2017 was that group revenues were still falling, coming in at €20.7 billion for the first nine months, down 10% from €22.9 billion in the same period of 2016. Cost cutting had to kick in hard at a bank that has become renowned for inefficiency. The cost-to-income ratio of 85.4% for the first nine months may look disappointing, but at least it is an improvement on 89.1% in 2016.
Rebuilding revenue now depends a great deal on efforts to recombine Deutsche’s excellent global transaction bank with its FICC-heavy global markets businesses and its corporate finance teams into a coherently managed corporate and investment bank.
“The executive committee decisions and management appointments have been made and implementation is well under way,” von Moltke says. “The CIB has faced revenue headwinds and there has been a lot of comment about Deutsche Bank losing market share. But I can assure you that much of that has been our own decision to off-board clients and then to segment and focus more tightly on fewer customers that we can serve well across a range of products and geographies.”
The bank does not want to give up much more ground. It has been hiring again, for example in flow credit sales, trading and research in Europe and the US. It will have to hope that its equity raising and resolution with the DoJ will make it a more acceptable recipient of investment banking mandates once more.
There are signs this is happening. It is advising Unibail-Rodamco on the French property company’s agreed $24.7 billion offer for Westfield.
“When Brexit happens, we will be one of very few eurozone corporate and investment banks with the full range of capabilities, and it is now an appropriate strategy to preserve that product, geography and client perimeter, while acknowledging the near-term revenue headwinds,” says von Moltke.
“Following strategic re-sets in 2015, idiosyncratic problems in 2016 and major initiatives in 2017, the time has come to let the dust settle on reorganizations and allow the businesses to deliver,” he adds, hopefully.
