Deutsche Bank Has No ‘Plan B’

Critics are renewing attacks on the German giant’s investment banking division now that talks with Commerzbank have collapsed.

By Steve Arons and James Hertling and cross-posted from Bloomberg Businessweek

More than four years after the leaders of Deutsche Bank AG unveiled their first postcrisis strategic reboot, they’re back at square one. It’s the eternal turnaround.

The giant German bank’s core problem is the same—costs are too high, revenue is too low—but there are fewer levers for Chairman Paul Achleitner and Chief Executive Officer Christian Sewing to pull now that merger talks with Commerzbank AG are off. The combination could have helped Deutsche Bank by taking out its biggest domestic rival and lowering its own funding costs by expanding its deposit base. But the obstacles to forging one sturdy institution out of two weak ones proved insurmountable. In a joint statement, the banks’ CEOs cited execution risks, restructuring costs, and the higher capital requirements the combined bank would face.

As the prospective merger collapsed, Deutsche Bank reminded its stakeholders how challenging the repair job is: Revenue in the first three months of 2019 fell for the ninth straight quarter, and, more important for an executive team committed to cost-cutting, expenses climbed as a percentage of total sales. The bank’s shares are so battered they trade for about a quarter of the value of its net assets—far less than its biggest competitors.

But Deutsche Bank has virtually no proposal for what to do next, with the risk of a potentially catastrophic downgrade in its credit rating looming. The bank has repeatedly said it will protect its rating. Its leaders reaffirmed cost-cutting targets, saying they are dependent on a benign market to reach their profitability goal. Beyond that, no one will speak about new initiatives, apart from saying they’re looking at “alternatives” to the current plan. Since the bank has plenty of capital and cash, a plodding, grinding campaign to reduce expenses seems to be the strategy. At least that’s what some unimpressed analysts and shareholders fear. “We think [Deutsche Bank] will continue to lose market share in trading as it needs to continue to cut expenses amid elevated funding costs,” wrote Credit Suisse Group AG analyst Jon Peace in a note. Deutsche Bank stock was above €20 when the board started hatching turnaround plans in 2015. Its shares trade at about €7.25 now

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