Deutsche Bank gives itself a chance of revival

LONDON: Deutsche Bank's new strategy relies on investment banking to come good. Germany's largest lender by assets said on Sunday it would raise 10 billion euros via measures including a rights issue and the flotation of a bit of its funds business.

That gives it a chance of normality, but to get to a modest return on tangible equity (RoTE) target of 10 percent, Deutsche will need some top-line growth even as it slashes costs.

Chief Executive John Cryan has performed two U-turns.

The first: tapping investors for fresh equity through an 8 billion euro rights issue, in spite of previous assurances the bank could grow capital organically.

Fully underwritten, the subscription price is likely to represent a 30 percent discount to the theoretical level at which Deutsche's shares could trade after it is completed - a moderate discount, given questions about the bank's ability to keep operating last year.

The other volte-face concerns Deutsche's retail lending division, Postbank, which will now be retained rather than sold off.

Cryan needs to prove he can use the new funds better than previous management - Deutsche Bank has raised more than 20 billion euros in new capital since 2010 but has a market value of only 26 billion euros.

Given the group's adjusted expenses goal for 2021, the overall top line would need to be around 31.5 billion euros for Deutsche to reach an underlying 10 percent RoTE - 5 percent higher than 2016.

That calculation includes changes in Deutsche's tangible book value as a result of the fresh capital, disposals and restructuring costs; the need to replace 25 percent of its asset management pre-tax earnings; and an estimated 1.2 billion euros of loan loss provisions.

All things being equal, Cryan would fancy his chances of minimal revenue growth over four years.

Trouble is, all things aren't equal. To grow revenue while slashing 12.5 percent off group costs, Deutsche will have to cross-sell more products to each client.

That could be a big ask in German retail banking. Although Deutsche has less interest rate-dependent income than other domestic lenders, returns have never been healthy.

The investment bank, where Deutsche cross-sells to just one-third of its clients, offers better prospects. But the bank's existing shareholders still face a long and uncertain wait for acceptable returns.