Deutsche Bank AG unveiled a radical overhaul that will see the lender exit its equities business, post a 2.8 billion-euro ($3.1 billion) second-quarter loss and cut the workforce by a fifth to reverse a slide in profitability.
Chief Executive Officer Christian Sewing will shelve the dividend this year and next and take restructuring charges of 7.4 billion euros through 2022 to pay for an overhaul that shrinks the German lender’s once-mighty investment bank along with its global footprint and key fixed-income business.
Deutsche Bank shares were down 0.7% in Frankfurt trading as of 12:35 p.m. after climbing as much as 4.4% earlier. The lender’s riskiest bonds also reversed earlier gains, with perpetual notes down about 0.5 euro cents to around 90 cents on the dollar and notes callable in 2022 down 0.4 cents. Analysts said that while the restructuring was broader than expected, the newly announced targets will be tough to achieve.
Today we have announced the most fundamental transformation of Deutsche Bank in decades,” Sewing said in a statement on Sunday. “We are tackling what is necessary to unleash our true potential.”
The scale of the revamp underscores the failure of Sewing and his recent predecessors to solve the fundamental problem: costs were too high and revenue too low. After government-brokered merger talks with Commerzbank AG collapsed in April, the CEO had few alternatives to bolster market confidence. His plan was approved by the board at a meeting Sunday.
Some of the financial targets set out in the plan look overly optimistic and the goal of achieving a return on tangible equity of 8% by 2022 looks “highly improbable,” Citigroup analysts including Andrew Coombs, Nicholas Herman wrote in a note to investors.
About 74 billion euros of risk-weighted assets will become part of a new non-core unit and the lender’s capital buffer will be reduced as part of the plan. With the stock price down by half in the past two years, selling new shares wasn’t an option and the bank said it does not plan a capital increase to pay for the overhaul.
Instead, Sewing is tapping into the bank’s capital cushion to fund what he’s billed as the bank’s biggest restructuring in decades — which means he needs to be strategic with the scarce financial resources he can generate. It will be the first time since at least 1993 that Deutsche Bank won’t distribute a dividend.