Deutsche Bank Restructuring

What Is Deutsche Bank Restructuring?

Bank restructuring refers to actions and decisions taken by the chief executive to strengthen the bank's position.

It is required in weak banks that might not be breaching prudential requirements but whose marginal capital and profitability can come under threat unless they are not restructured. It is required to fund and promote stronger growth.

Let us take a look at financial figures before the Deutsche restructure:

2017 vs. 2018- Comparative Analysis.

F.Y. 2019 1st Quarter Highlights:

• Net income up by 67%, after bank levy charges of 604 million euros.
• Revenues are down by 9% (5% ex-specific items).
• Revenues in Global Transaction Banking are up by 6%.
• Key business indicators were positive during the quarter.
• Loan growth of EUR 10 billion.
• Net asset inflows of EUR 10 billion.
• Cost savings offset lower revenues.
• Non-interest expenses were down by 8%, and adjusted costs were down by 7%.
• The Common Equity Tier 1 ratio rose to 13.7%.
• Managing Return on Tangible Equity target of above 4% in 2019.

Why was Deutsche Bank Restructuring needed?

Deutsche needed to maintain its profitability which wasn’t going smoothly. This can be seen from the quarterly results. It needed to cut down its adjusted operating costs to see growing profits.

Deutsche Bank lost money in its equities trading division. It could not compete with Wall Street players like J.P. Morgan and Morgan Stanley. Since the competition continued, the bank couldn’t bridge the gap in its financials, as per the reports.

Deutsche needed to strengthen its four divisions:

1. Asset Management 
2. Currency Trading 
3. Corporate-Cash Management
4. Trade Finance Divisions.

Deutsche Bank restructuring - Project Cairo

Let us take a look at the financials after the implementation of the plan:

1. Actual vs. Expected Results - 2nd Quarter of F.Y. 2019 

2. Ongoing Restructuring Phase- 3rd Quarter Results,2019, and reaffirmation by Deutsche Bank 

During the restructuring phase, the third quarter saw a net loss of EUR 832 million, driven by the Capital Release Unit (CRU). Core bank marked PBT (Profit before taxes) of EUR 353 million. The loan increased by EUR 12 billion with a Private bank in Germany.

It was said to maintain at least a CET1 ratio of 12.5% throughout the transformation. Apart from the abovementioned figures, the bank would achieve a target of 8% post-tax return on tangible equity in 2022.

3. Strategic Transformation is on track, as reported by Deutsche Bank in April 2020 

The first quarter of 2020 saw profits and growing revenues. The balance sheet strength was also maintained. The transformation continued as planned. The growing profits, transformation charges, balance sheet strength, and revenues can be seen below:

a) Balance Sheet Growth

The CET1 capital ratio of 12.8% was maintained despite inflation and COVID-19 impacts. The liquidity reserves remained strong, along with a Liquidity Coverage ratio of 133%. 

The liability side of the Balance Sheet showed that the loans increased by EUR 25 billion and the provision for credit loss of EUR 506 million (50% of the provision was due to Covid-19).

b) Profit and Loss Statement (Group profit driven by Core bank)

It showed group profit before tax (PBT) of EUR 206 million ( EUR 503 million charges levied by the bank and EUR 172 million transformation-related charges already adjusted).

Compared to last year's quarterly result, we can see that the adjusted PBT increased by 13%. Profit before Tax of the Core bank was up by 32%, and the core bank revenues were up by 7%.

In addition, the adjusted costs, ex-transformation charges, and bank levies were down by 7%. The data shows that 73% of anticipated costs were already absorbed. The leverage exposure of the Capital Release Unit was reduced by EUR 9 billion.

c) Support to clients

All the core businesses of Deutsche supported clients through challenging market conditions. This can be seen from the help provided by the bank as listed below:

• Corporate Bank 
  It earmarked EUR 20 billion for new credit extensions to corporate clients. It also applied for credit worth approximately EUR 4.4 billion under the German Government-sponsored Kfw loan program.
• Investment Bank 
  It helped companies and government clients raise over EUR 150 billion in debt financing.
• Private Bank 
  It continued to serve clients and provide direct access to them and new client loans of EUR 2 billion in the quarter.
• Asset Management
  It advised clients through its DWS Direkt channel and saw client engagements up by 50% through DWS Direkt and client website volume up by 25%. Transformation on Track-April,2020.

4. Deutsche Bank Restructure - completely on track as reported on July 29, 2020

The bank not only grew revenues but also reduced costs continuously. Christian Sewing stated that it was fully on track to meet all its targets. This can also be seen in the financials discussed below:

• Financial Figures (2nd Quarter Results)
  The group marked a PBT of EUR 158 million, compared to the loss of EUR 946 million in the 2nd Quarter of 2019.
  The group did amazing with the net profit since it had a profit after tax(PAT) of EUR 61 million compared to the loss of EUR 3.1 billion in the 2nd quarter of 2019. Moreover, the group's net revenues grew by 1% despite the bank’s equities exit.

• Significant details on transformation
  During the transformation phase, Deutsche completed its legal entity merger with a private bank in Germany. It combined its wealth management and private & commercial business and created an international private bank. It also completed the integration of its corporate bank in Germany.
  The bank set a target of EUR 200 billion for sustainable financing and investment and announced an agreement to form a partnership with Google Cloud.

5. 3rd Quarter Results, 2020 - strongest in F.Y. 2020

The restructuring is on track with a 3rd quarter profit of EUR 309 million and PBT of EUR 482 million. The group's net revenues grew by 13% to EUR 5.9 billion. The core bank net revenues were up by 9% to EUR 6.0 billion.

Let us talk about the revenues and expenses of core businesses of the bank for the 3rd Quarter:

• Revenue highlights for the 3rd Quarter-  
  The net revenue of the Investment Bank division was EUR 2.4 billion. The Private Bank was stable as volume growth offsets interest rates. The Corporate Bank was down by 5% (2% ex-fx translation effects), and the Asset Management net revenues were up by 4%.
• Expense highlights for the 3rd Quarter-
  The non-interest expenses and adjusted costs ex-transformation charges were down by 10% each. The risk-weighted assets were down by EUR 3 billion, and the common equity tier 1 capital ratio was stable at 13.3%.

6. Overall Financial Results and break-up of 4th Quarter Results, 2020 

Let us first see the 4th quarter profit after tax (PAT), PBT, net revenues, and expenses. During the 4th Quarter, the bank achieved a PAT of EUR 189 million (PBT of 591 million).

It achieved a net revenue of EUR 5.5 billion. The non-interest expenses were EUR 5 billion, and adjusted costs ex-transformation charges stood at EUR 4.6 billion. It maintained a CET1 ratio of 13.6% during the 4th Quarter.

The financial state's full-year net profit of EUR 624 million for F.Y. 2020 (PBT for F.Y. 2020 - EUR 1 billion). The significant growth in the core bank amounted to a PBT of EUR 3.2 billion for F.Y. 2020.

The group's net revenues rose by 4% to EUR 24.0 billion, and the core bank's net revenues rose by 6% to EUR 24.3 billion

7. Overall Financial Results for F.Y. 2021

Deutsche bank reported its highest full-year profit since 2011. The net profit for 2021 rose more than fourfold to EUR 2.5 billion, the highest since 2011.

The PBT rose threefold to EUR 3.4 billion, and the adjusted PBT stood at EUR 4.8 billion, more than double that of 2020. The bank intended to distribute approximately EUR 700 million of capital to shareholders.

Let us analyze the results for F.Y. 2021:

a. Core Bank

The PBT rose by 48% to EUR 4.8 billion in 2021. All core businesses contributed to year-on-year growth in profit as follows:

1. Corporate Bank: up by 86% to € 1.0 billion
2. Investment Bank: up by 17% to € 3.7 billion
3. Private Bank: up by € 465 million to € 366 million
4. Asset Management: up by 50% to € 816 million

The Post-tax RoTE was 6.4%, up from 4.0% in 2020 (adjusted post-tax RoTE was 8.5%, up from 5.7%). The core bank, which excludes the capital release unit, adjusted PBT by 46% to EUR 6.1 billion.

b. Capital Release Unit

It delivered another year of portfolio reduction. The transfer of clients, technology, and key staff from Deutsche Bank’s Global Prime Finance and Electronic Equities businesses to BNP Paribas was completed by the end of 2021, meeting the targeted timeline.

At the year-end, risk-weighted assets were reduced to EUR 28 billion in 2021 from EUR 34 billion in 2020.
The leverage exposure was reduced by 84% to EUR 39 billion. There was a substantial improvement in P&L since loss before tax was reduced to EUR 1.4 billion, down by 34% from 2020.

c. Revenue growth

The group's full-year net revenues rose by 6% to EUR 25.4 billion.

d. Expenses

The non-interest expenses were EUR 21.5 billion, including transformation-related effects of EUR 1.5 billion. The adjusted costs ex-transformation charges were down by 1% to EUR 19.3 billion from 2020 (10% down since 2019).

e. CET1 ratio

The common equity tier 1 ratio was 13.2% at the end of 2021 compared to 13.6% at the end of 2020. 

The results say it all. The financial results were back on track starting from F.Y. 2020, and it has been growing since then.

Deutsche Bank Restructuring: Favorable and Unfavorable Factors

While announcing the transformation of Deutsche Bank, Sewing clarified that they would tackle whatever was necessary to unleash the bank’s true potential.

The transformation marked a restart for Deutsche Bank. It returned to its roots. Deutsche was determined to generate long-term sustainable returns for shareholders and restore the bank's reputation.

1. Hurdles during restructuring:

The transformation started before the pandemic hit, and it had to exit equities. The major problem was due to the pandemic since asset prices and deals were derived by conditions surrounding the pandemic.

The major hurdles were credibility over execution, employees' motivation post-restructure, and revenue growth post-restructure.

Now the long-term sustainability was dependent on building its other divisions.

2. Factors that favored restructuring

The internal factors paved the way for growth along with the restructuring plan. The confidence among the employees made it easier to carry the plan forward. The transformation was successful because of the plan and also its execution. 

According to the Chairman of the Supervisory Board of Deutsche Bank, Paul Achleitner, the bank had a talented and dedicated team to relentlessly execute what the bank promised and create a sustainably profitable bank.

Deutsche Bank Restructuring: Sustaining Recovery and Bouncing back

Deutsche Bank reports profit-after-tax (PAT) of EUR 1.2 billion and PBT of EUR 1.6 billion for the 3rd quarter of 2022 - The highest 3rd Quarter profit since F.Y. 2006 - even after exiting Equities.

It managed to get out of equities before the equity boom happened. The graph below proves how the restructuring plan shaped Deutsche Bank in maintaining its revenues and getting back profits.

Comparison between Deutsche Bank, Barclays & J.P. Morgan shares indexed July 8, 2019

The Deutsche bank shares were trading at 50% above when its restructuring was announced. This is much more than Barclays and J.P. Morgan, which were 14% above and 37% above, respectively.

The graph below shows a spike in the share prices of all three banks during January 2020, and Deutsche was trading at the highest.

The price of shares stooped lowest during April 2020. During this time, Deutsche maintained its trading price. Despite its low trading price, it was still trading at the highest compared to J.P. Morgan and Barclays.

When the pandemic condition stabilized, the share prices rose again. It was the highest since July 2019. Deutsche traded above 180, J.P. Morgan traded between 140-150, and Barclays traded at 120, with Deutsche’s share price being the highest.

This showcased how efficiently Sewing managed and brought Deutsche Bank back to a better financial position.

Rebuilding Deutsche Bank US reputation

Sewing and his team knew they could not cut loose from the US market in restructuring.

As per many experts, they were already exiting equities, which posed a threat to the bank. US operations were cut back hard.

Sewing wanted a business that could support both US clients and Europeans to raise funds both ways.

While selecting banks, clients want good ideas and are never concerned about the bank's headquarters location.

Drew Goldman, global head of investment banking coverage and advisory, discussed a sell-side pitch for a fin-tech company for a venture capital firm. The client was never concerned about Deutsche being a European bank and the pitch selling US assets into the US.

In 2018, the Deutsche US franchise was charged $7.2 billion for wrongly selling US mortgaged securities. Fixing this took much more time than executives would have thought.

Deutsche Bank is here to stay. As reported, the US accounts are nearly two-thirds of the fee pool, which is the highest share since 2019.

Clients are okay with the bank exiting equities, but they were looking forward to testing its fixed income perimeter. At the beginning of 2020, the ultimate test of liquidity and deployment in businesses retained happened, and Deutsche Bank not only stayed through it but also is performing strongly.

Researched and authored by Shambhavi Himatsingka |  LinkedIn

Reviewed and edited by Parul Gupta | LinkedIn

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