Deutsche Bank shares sank on the day after the 149-year-old bank announced its latest, and deepest, restructuring effort. The stock market reaction signals that investors are uncertain about a turnaround plan that will see the lender slash 18,000 jobs and retreat from operations around the world.
The German bank’s shares fell 5.7%, to €6.77, at the time of writing, not far off the all-time low of around €6.00 set last month. Since then, Deutsche Bank’s stock had been rising steadily, including in the early hours of trading today, as investors cheered the weekend announcement of CEO Christian Sewing’s ambitious plan to put the company on solid footing after years of losses and failed turnaround efforts.
But that optimism faded as traders and analysts pored over the details of Deutsche’s strategy. The company’s contingent convertible bonds, a type of debt that will absorb the first losses should the bank struggle to pay its debts, also drifted lower in price.
The market reaction underscores the challenges that the Frankfurt-based bank faces as Sewing looks to implement what he called “nothing less than a fundamental rebuilding of Deutsche Bank.” He said the company will focus on its roots in Germany and Europe, leaning heavily on its corporate bank centered on medium-sized clients, family-owned companies, and multinational corporates.
“People will now look at how fast, how decisive, how disciplined we are in execution,” Sewing said in a video released today. “We stay global, we stay in the important investment banking, but we need to get more focused in order to apply our power there were we compete to win and where we can win.”
Bankers were reportedly getting notices of their redundancies today in London and New York, where some of the deepest cuts were taking place. The bank is quitting equity sales and trading entirely, and sharply reducing the amount of capital it devotes to its bond-trading business. By 2022, it will have shed about one in five of the workers it employs today. It will shift €74 billion ($83 billion) in risk-weighted assets into a so-called “bad bank” to run off.
Deutsche Bank will have little room for error in executing its plans. Its capital levels will “remain stretched” and barely sit above the regulatory minimums in coming years, according to Dierk Brandenburg, team leader for financial institutions at Scope Ratings. Its cost-to-income ratio will still be high compared to peers, even after slashing its workforce and reducing costs by around €6 billion. This will give the bank “very little leeway to catch up with its competitors as well as tech companies that are entering the market at increasing speed,” Brandenburg said in a report.
The impact of the restructuring will result in a hit of €5 billion to the bank’s earnings this year, possibly setting it up for yet another loss-making year. Dividends will be suspended in 2019 and 2020.
Some argue that Deutsche Bank has been slower than its rivals in the US and Europe to accept losses, and adjust to post-financial-crisis world of stricter regulations and lower interest rates that make it more difficult for banks to turn a profit. “Deutsche Bank is doing now what it failed to do in recent restructuring attempts,” Brandenburg said. “Only time will tell if it is different this time and whether the new stand-alone corporate bank will earn its keep.”