This weekend, German lender Deutsche Bank (DB - Free Report) announced a major restructuring plan that it will undertake over the next four years. The restructuring is projected to cost a total of $8.3 billion and is to be completed by the end of 2022. Executives at DB have stated that this will be the last restructuring for the bank.
One of the major goals of this undertaking is to cut the organization’s expenses. With significant department trimming and employee downsizing, the bank plans to cut adjusted operating costs by a quarter to $17 billion by 2022. These cuts will come mostly from the goal to let go 18,000 employees by 2022, roughly a fifth of DB’s workforce.
Aside from downsizing its workforce, the largest change is Deutsche Bank’s plan to exit the global equities sales and trading business. It will still offer related services, such as share-underwriting, and will retain its leveraged finance division. This has caused some Wall Street analysts to question the commitment of CEO Christian Sewing to truly exiting the equities trading space.
DB’s exit from equities trading marks the end of a long attempt to compete with Wall Street players J.P Morgan (JPM - Free Report) , Morgan Stanley (MS - Free Report) , and Goldman Sachs (GS - Free Report) . The division has been losing money and cannot compete, as investment banking becomes more of an arms race of volume and technology.
Most other European banks have come to this realization in recent years as well. DB is definitely on the trailing end of this trend, with Credit Suisse (CS - Free Report) and UBS (UBS - Free Report) restructuring away from equities trading in 2015 and 2012, respectively.
Deutsche Bank plans to move its focus to serving European companies and retail-banking customers. It also has plans to strengthen its asset management, currency trading, corporate-cash management, and trade finance divisions.
This plan is, however, risky as it factors in a projected 8% return on tangible equity by 2022, which may be too ambitious, especially given Germany’s negative bond yields. If the bank spends too much during its restructuring, it could be forced to raise capital so that it does not fall below its required minimum CET1 ratio of 12.5%.
Unfortunately, investors do not seem to be thrilled with this large trajectory change for DB, as shares are down 8.2% since Friday. This is likely due in part to Deutsche Bank’s new projection that it will post a $2.8 billion loss in Q2 2019, and will likely not be profitable until late 2020 or 2021.
Deutsche Bank is currently a Zacks Rank #4 (Sell) and is already down 7.5% YTD. Due to costs incurred by restructuring, earnings are projected to shrink by 6,100% in 2019, then start to bounce back with a slower 335% growth in 2020. DB has been valued at a roughly average P/E to the rest of the foreign banking industry for the past 3 years.
This restructuring could be positive for DB in the long run, allowing the bank to focus on areas where it has historically performed well. However, this will come at a high cost and some risk. Between the high price tag of reorganization and the additional regulatory scrutiny restructuring will bring, this bank will have to execute it well in order to come out profitable and solvent on the other side.
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