Shares of Deutsche Bank (DB) , the beleaguered German big bank, are falling after announcing massive restructuring plans that aim to streamline the business.
Shares sunk over 3% in pre-market hours on Monday, tempering what had been a solid comeback from all-time lows in early June, trading below $7 per share at that time.
"Today we have announced the most fundamental transformation of Deutsche Bank in decades," CEO Christian Sewing said on Sunday. "We are tackling what is necessary to unleash our true potential: our business model, costs, capital and the management team. We are building on our strengths. This is a restart for Deutsche Bank - for the long-term benefit of our clients, employees, investors and society."
As part of the transformation, Sewing noted that the bank will be "returning to its roots", exiting some of the sprawling international interests it has built over the years and creating a new corporate bank as a hub for commercial clients.
"In total, we will be transferring 74 billion euros of risk weighted assets into the Capital Release Unit (CRU) to be sold over the course of the coming years," Sewing explained in an email to employees.
The offloading of the troubled assets has been widely called a "bad bank" in media reports, though Sewing quibbled with this notion.
"Given the high quality and in many cases short duration of the assets, we expect these to be wound down quickly," he retorted. "This will serve to free up significant amounts of capital. As a result, we intend to return €5 billion to shareholders from 2022."
As a key aspect of the restructuring, the German bank will be exiting equities sales and the trading business, and reducing capital used by its fixed income unit.
"In those areas where we are not currently competing to win, we are now taking decisive action," Sewing explained. "Indeed, we have no choice other than to concentrate our strengths and resources where we play to win and where we can make a true difference for our clients."
In exiting the equities sales and trading arena, and reducing overhead elsewhere, the bank expects one-off charges including impairments, restructuring costs and severance payments of €7.4 billion by 2022. For 2019, the total impact is expected to be approximately €5.1 billion, €3 billion of which is expected to impact the second quarter.
A press release explains that Deutsche Bank expects to report a second quarter 2019 loss before income taxes of approximately €500 million and a net loss of €2.8 billion euros.
The overall restructuring actions also entail massive job cuts, with 18,000 employees expected to receive pink slips by 2022. The purge appears to be culling the top ranks as well, with Bloomberg reporting that fixed income leaders Yanni Pipilis and James Davies are headed for the exits, while investment bank chief Garth Ritchie, retail head Frank Strauss, and Chief Regulatory Officer Sylvie Matherat, have been confirmed by Sewing as prominent departures already.
We are all well aware that $DB is a total shit show and is something I have been talking about for the last few years. The news out this weekend of a restructuring and loss of 20,000 jobs simply can not be achieved fast enough and all the senior leaders are bolting for the exits pic.twitter.com/W9kRw0o086— Raoul Pal (@RaoulGMI) July 7, 2019
"We will do whatever it takes to implement these cuts as responsibly as possible - I consider it our duty to do so," Sewing told existing employees. "Taking this decision has not been easy. It has far-reaching consequences for our bank - the bank that I have been working at for almost thirty years now."
In aggregate, the bank expects to reduce adjusted costs by approximately €6 billion to €17 billion in 2022 through this series of actions and aims to reduce its cost-income ratio to 70% in 2022, leading management to target a post-tax Return on Tangible Equity of 8% at the Group level by that end-date.
The restructuring effort is also aimed at freeing up €17 billion in aggregate to invest in technology and controls by 2022, keys to driving efficiency in the bank's grand plan.
Still, analysts have noted that this plan appears possibly overly ambitious, especially given the massive staff cuts that make any acceleration in the business difficult to forecast.
Credit rating agency Moody's (MCO) has likewise retained a negative outlook on the company's credit despite the sweeping changes.
"The negative outlook continues to reflect the significant challenges DB faces in swiftly executing on the proposed plans, in particular with regard to sustaining its revenue base in the remaining fixed income-related businesses, reducing the drag of the CRU as well as growing its corporate banking franchise against fierce competition," a Monday morning update reads. "The downsizing will also have to be conducted in a period of persistently ultra-low interest rates which is negatively affecting the profitability of DB's German banking franchise as well as its asset and wealth management operations. Achieving a better, more balanced and sustainable profitability position will therefore take several quarters, if not years, to materialize."
The near-term losses therefore cannot be ignored as its credit remains on shaky footing and should help explain the stock's reaction on Monday morning.