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This time it might be different
If any global bank has embodied the restructuring theme in 2019, it is Deutsche Bank.
The biggest challenge faced by chief executive Christian Sewing over the last year has been to overcome the weariness of long-suffering shareholders all too used to seeing the bank’s previous management trot out half-hearted commitments to change.
Now it has fallen to Sewing to achieve what his predecessors signally failed to do. And so the familiar question is asked: is it different this time? It just might be.
Above all, he is executing his plans, as he outlined in a marathon ‘deep dive’ for investors on December 10. He has already exited businesses, with the most eye-catching move being the decision to shut down the majority of equities sales and trading.
An agreement has been reached to transfer the prime finance and electronic execution business to BNP Paribas.
Assets now deemed non-core, which are being held in the bank’s capital release unit (CRU), are being disposed of apace – and at far from distressed levels. The CRU has now offloaded €9 billion of risk-weighted assets since the second quarter of 2019 and is ahead of plan.
But aside from execution, there are three other compelling arguments for confidence.
First, the bank’s approach to cost management is far more aggressive than it has been in the past.
Second, Sewing’s restructuring plan was always predicated on not asking shareholders to fund it: it is to be done with existing resources only.
And third, the scope of his shake-up, particularly of the investment bank, is simply far more radical than what has been attempted before. The fact that Sewing told investors that he was even raising the annual revenue growth target for the investment bank from zero to 2% by 2022, in spite of the cuts, is an indication that the objective is to do more with less.
The new plan – to reorganize the bank around four core business lines, with the corporate bank at their heart, while cutting and redeploying risk-weighted assets from areas that could not pay their way – has had no shortage of scrutiny since it was unveiled in early July.
But amid the reams of strategic analysis, one aspect can get lost. The transformation that Sewing is implementing would not be possible were it not for radical changes in the way that the bank manages its balance sheet. These were changes that were already under way before the restructuring was put in place, but they have been instrumental.
“It was crucial in order to have the flexibility to undertake the restructuring,” says Dixit Joshi, treasurer of Deutsche Bank since April 2017. “As we reset the firm, it is now advantageous that we have low risk levels, reflecting our conservative business model. It is about managing our capital and liquidity ratios above regulatory requirements, while allowing our core businesses to grow.”
So, what’s changed? First is a much greater focus on managing resources efficiently, says Joshi.
“In that respect, we are reflecting the post-crisis new normal, which is the reality of multiple constraints in many regions and at the business unit and legal entity level.”
Over time, the bank has accumulated liquidity coverage and regulatory capital that are surplus not only to regulatory requirements but also to its own internal risk appetite. It was back in the third quarter of 2018 that Joshi signalled to the market that he would start to deploy that excess – something that could only happen after a concentrated effort to invest in controls, technology, governance and risk management.
“We have one of the highest proportions of cash on our balance sheet compared to peers,” he notes. “As we seek to defray the cost of negative rates and holding inefficient cash at the central bank, we will reallocate liquidity to productive assets.”
There were other things going on behind the scenes in the long run-up to July. For a whole year before, the bank had been building a new fund transfer pricing framework. Rather than simply being a mechanism to allocate funding costs internally, the new approach was to tailor it to the marginal cost of undertaking transactions.
Launching alongside that in July was a driver-based cost management (DBCM) system, allowing far more granular analysis and allocation than before. Sewing and Deutsche CFO James von Moltke constantly refer to the fact that the bank has now seen seven quarters of year-on-year cost reduction. DBCM will be vital in ensuring that continues.
Shareholders are taking a while to be convinced. At the time of writing, the bank’s stock is down 8.6% since the restructuring was announced.