By Geoffrey Smith
The shares of Deutsche Bank (DE: DBKGn) have reached a two-month peak on Monday after the announcement of a radical revision over the weekend, which will reduce its balance sheet by more than 20 % and its workforce by a quarter.
The bank wants to become in 20 years one of the main investment banks in the world, crazy, ambitious, and destructive, which resulted in a massive destruction of value for shareholders, while enriching a succession of senior executives and traders.
The shares were up 2.5% this morning, while most of Europe was in decline. The increase is now more than 20% since the publication of the details of the plans in June. The DAX index fell 0.2%, while the STOXX 600 was unchanged.
This announcement marks a change of course for the largest German bank, which is reluctant for years to cut a unit that is still struggling to cover its costs and that has been at the origin of a series of scandals, costly that have cost billions of dollars in legal fees.
The restructuring is even more important than suggested in the leaks early: the bank will allocate a portion of the $ 72 billion of its 347 billion euros of risk-weighted assets risk-based in a unit that will be liquidated by 2022. The bank expects that ”the unity of the liberation of capital” – a euphemism for bad bank – frees up 5 billion euros to shareholders from 2022, but their request to go without dividends for the next two years.
When the restructuring will be completed, Deutsche Bank will become an institute much more conservative, focused on meeting the needs of companies in germany, vision of the CEO, Christian Sewing, calls for a return to the sources of the bank. The bank derived will be required to hold less capital, but will always struggle to make a profit, given the market fundamentals German bank. Management does not expect a return on equity tangible than 8% by 2022 (compared to the initial target of 10% already next year).
The reality is that the bank simply can not go back. When he began his quest for world domination in the 1990s, he held significant interests in a long list of national societies which gave him an unparalleled influence in their boards of directors. In the more globalized world of today, where the finance is most often a commodity like any other, the companies in the DAX have many other options and are not afraid to use them: the bank has been largely excluded from the exchange of assets between the two largest energy companies in germany, RWE and E. On, last year. More importantly, while the European Central Bank is about to reduce the interest rate below zero, its lending activity key, it will be difficult to generate a lot of profits for years to come.
The shares may be up this morning, but they are still down over 90% from their peak. The legacy of this ambition is misguided is that the market assigns a value of only 5% of that of JPMorgan Chase & Co (NYSE: JPM), against which he once dreamed to be measured.