Sewing parrots Cryan


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Christian Sewing has been painted as the stern cost disciplinarian and man of action, so he had to unveil something decisive-sounding at his first results call — even if it smacks of tokenism

A blunt-speaking new chief executive steps up and declares that Deutsche Bank has allowed itself to become too inefficient. The cost base is swollen by poor and ineffective processes. The bank is too diversified and too complex for its own good and must simplify its business model. Where the new broom encounters marginal businesses with poor prospects they will be swept away. And there’s more. The bank absolutely must wean itself off the proliferation of committees and instead empower managers to make tough decisions that are then properly documented and implemented.

But let’s not hark back to John Cryan’s first message to employees on July 1, 2015, shall we?

Let’s rather consider the pronouncements of Christian Sewing at Deutsche Bank’s first quarter 2018 results call at the end of April.

It seems that the bank has let itself become too inefficient. The cost base is swollen. Immediate steps must be taken to curtail balance sheet and other resources committed to low return activities. The chief financial officer has started a strategic “Cost Catalyst Programme” supported by the entire management board. But this is not management by committee. Oh no. More decision making will be delegated to the businesses and they will be held more accountable.

There’s a reason why the share price barely moved. Investors have heard most of this before.

But though his promotion to replace the ousted Cryan was badly handled, as Euromoney reported this week, Sewing deserves his chance to carve the new identity Deutsche Bank has desperately needed for so long.

Knowing he had already been cast as the decisive man of action and had to announce something, Sewing presented plans to cut costs this year by “rightsizing” the bank’s biggest division, the corporate and investment bank (CIB). Deutsche will cut back in US rates sales and trading and also review its global equities business with the expectation of reducing leverage exposure to global prime finance.

By cutting jobs outside Germany, where unions treat employment contracts as life-time commitments, Sewing may win a pat on the back from the supervisory board for cutting costs this year. Hopefully his risk managers will be able rapidly to manage down associated legacy positions that should have been marked close to re-sale value – where there is an active, two-way market ­– before they turn loss-making.

It sounds bold at first, although analysts on the earnings call weren’t hugely impressed by additional restructuring charges of €300 million for 2018 to achieve these newly announced job cuts. Applying a rule of thumb that these charges typically account for 150% of recurring costs taken out, that implies €200 million of new annual cost saves in a division that ran on €13.1 billion of non-interest expenses in 2017: so less than 2%. “This looks like tinkering,” says one.

And both Sewing and chief financial officer James von Moltke, who took the lead with analysts and answered most of their questions unassisted by his CEO, were at pains to emphasize that this is not a withdrawal from investment banking in the US.

Sewing reminded analysts that Deutsche Bank has strengths its corporate and investment bank can play to. “We are the leading global clearer of euro-denominated payments.” He also declared an aim to boost to 50% the proportion of group revenues coming from stable sources such as retail banking in Germany and asset management, by 2021.

Presumably he hopes to attract a higher valuation to more stable revenues, although the bank looks to be pinning its hopes on a retail bank with a mid-single digit return on equity at best. Apparently, the bank does not aim to scale up through consolidation in Germany. And that’s no wonder, says one insider, given the pain Sewing went through with the unions on job cuts from the integration with Postbank. It might invest in Italy and, perhaps surprisingly, Spain.

If Deutsche is not going to grow through acquisition in Germany, then it looks like that 50-50 revenue balance must come from shrinking the CIB. But Sewing can play games too. He suggests that analysts should include global transaction banking revenues from inside the CIB in the stable revenues portion, raising it – hey presto ­– ­ to 65% of the group. See. This CEO gig isn't so hard after all.

Analysts at Citi didn’t get the details they wanted on likely revenue attrition which they fear could be sizeable and run ahead of cost saves. More specifically, they worry that in seeking to concentrate on European clients the pullback from US and Asian corporates could have a knock-on impact to the credit and FX business that the bank wants to grow. Meanwhile the reduction in prime could have a knock-on impact to the cash equities and derivatives franchises. Even at just €11.7 per share, Citi retains its sell and high risk call on the stock.

Euromoney’s key take away is that it’s what creditors make of the numbers that counts the most now. As well as trying to cut costs, Deutsche Bank’s key motivation in these announcements seems to be cutting its leverage exposure. Its leverage ratio is just 3.7% compared to an eventual target of 4.5%. It has a long way to go to get there and it’s not generating any capital from retained earnings.