Deutsche Bank Affirms Targets, ECB Reduces Capital Requirement

At its “Investor Deep Dive”, Deutsche Bank (DE:DBKGn)’s (NYSE:DB) chief executive, Christian Sewing, reported the progress on the bank’s transformation strategy. Five months post announcement of its strategy, Sewing had a comprehensive status report. Per the German bank, implementation of the strategy is in line with the plan as well as ahead in various areas.

Sewing noted, “In the past few months we have made significant progress on every dimension of our strategic transformation. We are in line with our plan and even ahead in several areas.”

Financial Targets Reaffirmed

Cost targets for 2019, 2020 and 2022 were maintained by the bank. Reflecting reduction of around 6 billion euros as compared with 2018, adjusted costs before transformation-related charges and the impact of the Global Prime Finance transfer to BNP Paribas (PA:BNPP) are likely to be 21.5 billion euros this year, with the aim of 19.5 billion euros in 2020 and 17 billion euros in 2022.

Further, Common Equity Tier 1 (CET 1) ratio of minimum 12.5% through the phase of transformation has been reaffirmed. Per Deutsche Bank, asset reduction in the Capital Release Unit is well ahead of the plan, with current expectation of CET 1 ratio of above 13% at the end of 2019.

The target of an 8% post-tax return on tangible equity (RoTE) in 2022 was also maintained, given external headwinds, including interest-rate movements in the euro area. Notably, various measures have been implemented by the bank to nullify the impact of lower interest rates to a greater extent. Loan growth, passing through negative interest rates, further optimization of liquidity reserves and using deposit tiering arrangements initiated by the European Central Bank (ECB) advantageously are some of the measures.

For the Core Bank, excluding the Capital Release Unit, Deutsche Bank anticipates post-tax RoTE target of above 9% in 2022.

Per management anticipations, the interest-rate environment is likely to impact the returns in the Private Bank and Corporate Bank in the mid-term, partly offset by revenue growth in the Investment Bank and Corporate & Other.

Sewing further stated, “Making a strong start to our unprecedented transformation was all important. Clients, regulators and our own people have all voiced their firm support for the path we have embarked upon. This support will help us progress our transformation in a disciplined manner.”

ECB Reduces Capital Requirement

On the other side, Deutsche Bank’s Common Equity Tier 1 (CET 1) capital ratio requirement has been reduced by the ECB from 11.84% to 11.59%, effective Jan 1, 2020. This move follows the bank’s progress since the first SREP assessment in 2016 and the 2019 Supervisory Review and Evaluation Process (SREP). The decline in ratio attributes to the reduction in the ECB’s Pillar 2 requirement from 2.75% to 2.50%, effective Jan 1, 2020.

“We welcome the ECB’s decision to reduce Deutsche Bank’s capital requirement”, said James von Moltke, the chief financial officer. “This reflects the progress we have made and our ongoing commitment to conservative balance sheet management and strong internal controls. Our current CET 1 ratio is comfortably above requirements, and we are committed to maintaining robust capital levels throughout the implementation of our transformation strategy,” he further noted.

Bottom Line

Though Deutsche Bank is adhering to measures to revive the business, it continues to be plagued with several headwinds and remains under close scrutiny of investors. Also, litigation issues related to past misconducts and legal costs might impede bottom-line growth.

Deutsche Bank currently carries a Zacks Rank #4 (Sell). Shares of the company have gained around 4.5% over the last six months as against the 1.1% decline recorded by the industry.

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