Via Financial Times

When a delighted oenophile started praising the “excellent” choice of red wine at a shareholder dinner this month, Christian Sewing moved to dispel any notion that Deutsche Bank was back to its profligate ways.

“Enjoy it while it lasts,” the chief executive told a small group of the bank’s key investors who had gathered in the 34th-floor dining area of its Frankfurt headquarters, after a marathon five-hour strategy presentation.

He explained the two-decade-old bottles from a famous French vineyard were “leftover stock” acquired in more flamboyant times, and sought to reassure investors that such luxuries were now forbidden under his parsimonious regime.

Mr Sewing’s emphasis on austerity is understandable after a tumultuous 2019 for Germany’s largest lender, in which decades of accumulated problems came spectacularly to a head.

Deutsche’s shares plunged to a record low as it grappled with profit warnings, regulatory probes and a global economic slowdown. A merger with equally troubled domestic rival Commerzbank was abandoned in April after six weeks of fruitless talks. In a fresh push to convince investors that Deutsche has a viable future as a standalone business, in July Mr Sewing announced the bank’s most radical strategic overhaul in two decades. Deutsche is relinquishing its ambitions to be a global investment bank, cutting 18,000 jobs, closing equities trading and forming a roughly €280bn bad bank to run down unwanted assets.

Leading this turnround plan is Mr Sewing, a no-nonsense, down-to-earth leader, according to those who have worked with him. He began his career at Deutsche 30 years ago as an apprentice and, before joining the executive board in 2015, he worked in various risk-management and auditing roles on three continents.

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Ahead of Deutsche’s 150th anniversary in March, Mr Sewing claims he has broken with the mistakes of the past and is no longer “denying or turning a blind eye to our weaknesses — we are tackling them head on . . . we are in relentless execution mode,” he told analysts in July. Mr Sewing declined to be interviewed for this article.

Despite this, pessimism remains widespread about management’s ability to execute the latest restructuring, which marks the bank’s fifth strategic overhaul in seven years.

“Many people still think: ‘well, it is Deutsche Bank — they will find a way to disappoint’,” said one of the bank’s top-10 shareholders. “I disagree because this management team is different. Christian set a really good tone and there is no infighting between the investment bank and private bank [any more].”

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A slowing German economy and the European Central Bank’s more aggressive negative interest rate policy have added to Deutsche’s woes since July as it increases the pressure on the lender’s interest income and pushes up the costs for parking cash at the ECB.

The bank’s shares, which dropped sharply in the first few weeks after the cuts were announced, have still not fully recovered those losses and languish near a record low.

The stock trades at an 80 per cent discount to the net value of its assets, the steepest of any major European bank.

Chief among investors’ concerns is Mr Sewing’s new-found optimism for the investment bank, which in July he described as a business where “we lost our compass in the last two decades”. He accused his predecessors of a “culture of poor capital allocation” and chasing revenue, without concern for sustainable profits.

Yet, this month, in a change of tone that surprised many, Mr Sewing revised upwards the 2022 targets, signalling that the investment bank will again become Deutsche’s fastest-growing business.

While the bank lowered its outlook for the private bank and asset management — two divisions previously praised for stable and predictable earnings — the investment bank is now expected to grow by an average of 2 per cent per year and generate a return on tangible shareholder equity of up to 8 per cent by 2022. Just five months earlier, the bank had said that the unit’s revenue would be flat over the coming three years, and deemed a 6 per cent return on equity realistic.

Line chart of Share price (€) showing Deutsche Bank in 2019

“Management expectations [are] still far too bullish,” warns KBW analyst Thomas Hallet, who sees tougher regulation, stiff competition and low interest rates undermining growth.

No other European investment bank has boosted its forecast for investment banking and Deutsche is currently at the bottom of performance tables. During the first nine months of 2019, investment banking revenue fell by a tenth, pre-tax profit plunged by almost half, and it generated a return on equity of 1.8 per cent over that period, spending 88 cents of every euro earned.

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Globally, Deutsche has slipped to 15th position for advising on mergers and acquisitions so far this year, down four positions from 2018; and for deals in its domestic market it has dropped two spots to seventh place, according to Dealogic.

“The higher growth target for the investment bank came as a surprise given Deutsche’s unimpressive track record and its inherent volatility,” said Alexandra Annecke of Union Investment, a German asset manager that owns 0.4 per cent of the lender. “This could weigh on its stock market valuation because investment banking is valued at lower multiples than [the] more stable businesses.”

Deutsche claims it has become more optimistic because fewer clients left the bank than expected when it closed the equities business — only 3 per cent, according to one executive — and transaction margins are improving as funding costs fall.

The price of the bank’s credit default swaps — derivatives that pay out if a company defaults on its bonds — demonstrate this improvement. They have fallen from a peak of around 180 basis points last year to around 66 basis points now, narrowing the funding-cost gap between Deutsche and rivals that was pricing it out of deals.

Deutsche has also made headway in getting rid of unwanted assets. By the end of this year, half of all those earmarked for disposal will have already left Deutsche’s balance sheet.

Regulators are pleased with progress, offering rare praise for Mr Sewing’s nascent transformation. Andrea Enria, the eurozone’s chief banking supervisor, said at a December conference that, while Deutsche “had clearly an issue with the viability of the business model” it is “well along in executing its new strategic plan” and “has made good progress in enhancing controls and reducing [its] risk profile”.

Reflecting this progress, this month supervisors lowered Deutsche’s minimum common equity tier one ratio (CET1) — a key indicator of balance sheet strength — by 25 basis points to 11.6 per cent. Deutsche has suspended its 2019 and 2020 dividends to help strengthen its balance sheet.

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Mr Sewing’s task has been complicated by a barrage of negative news over redundancies, management change and regulatory scandals that have rocked investors’ confidence and undermined the bank’s assurances that it had addressed past misconduct and improved its control functions.

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In July, senior bankers caused a PR crisis when they invited tailors to Deutsche’s London headquarters to have made-to-measure suits fitted. Their timing was inauspicious: it was the day the lender announced 18,000 job cuts. Mr Sewing personally called them to tell them off. “This behaviour is in no way consistent with our values,” he later said.

This month Frankfurt prosecutors forced Deutsche to pay out €15m for shortcomings in money-laundering controls. While they dropped a more substantial criminal investigation into suspected tax evasion, Mr Sewing has several other serious regulatory issues to tackle in 2020.

In early December Deutsche was ordered by a federal appeals court in New York to disclose Donald Trump’s financial records — which the bank has so far refused to hand over — part of an investigation into the US president’s tax returns.

There are also several international investigations into Deutsche Bank’s role in the €200bn Danske Bank money-laundering scandal. Until 2015, the German lender acted as a correspondent bank for Danske’s Estonian branch, clearing about €160bn of potentially suspicious transactions.

Pay and talent retention will be another challenge for Deutsche’s investment bank. After more than a dozen top executives left in 2019, more could follow as the bank is set to cut its bonus pool again by as much as a fifth, the FT has reported.

Concrete actions such as the balance sheet and compensation cuts are welcomed by investors, but many still put question marks over the long-term rehabilitation of Deutsche. “For the market, seeing is believing,” said Union’s Ms Annecke.

Mr Sewing and his top team are acutely aware of this scepticism and the need to shake off the bad-will that has built up since its launched its disastrous attempt to be the “Goldman Sachs of Europe” 20 years ago.

“This bank has been great at designing powerpoints, promising a lot to regulators and investors, then we executed only 60 per cent [of our plans] and put the rest in the drawer,” says one top executive. “We are closing that credibility gap now.”

Even if that means replacing fine vintage wine with the supermarket variety.