Deutsche Bank’s Radical Pivot Ignites Stock Implosion

Journalist:
July 8, 2019

German multinational investment giant Deutsche Bank‘s stock plunged nearly 6 percent today after news emerged of a dramatic cost-cutting drive that could eliminate 18,000 jobs.

Deutsche Bank Stock Slides Nearly 6%

On Sunday, the bank announced its exit from the equities sales and trading business, revealing that it plans to overhaul its operations and return to being customer-centric in a bid to drive up profits or at the very least break even by 2020.

DB shares plunged as much as 7 percent on the news. | Source: Yahoo Finance

Speaking in an official announcement, CEO Christian Sewing said the new strategy was the best and would enable the bank “unleash our true potential.” He added that it was a necessary step to go back to what made it initially successful, and stop spreading itself too thinly across too many markets.

Coming after a month that has seen the bank’s stock gain steadily, the news has deflated investors as the clear message is that belts will be tightened.

Today’s downturn reversed much of the stock’s monthlong rally. | Source: Yahoo Finance

Ruthless Cost-Cutting Comes with Pain

This radical transformation plan is expected to cost the bank around $8.3 billion in severance packages and restructuring costs alone. While the market is clearly taking a dim view of the move, supervisory board Chairman Paul Achleitner believes that it is a positive sign for the future of the bank. Speaking in the announcement, he said:

“This fundamental transformation is the right response to the major changes and challenges in the financial industry. Deutsche Bank has been through a difficult period over the past decade, but with this new strategy in place we now have every reason to look forward with confidence and optimism. We have a talented and dedicated team at the helm to relentlessly execute what we promise today and to create a sustainably profitable bank.”

As many as 18,000 Deutsche Bank employees could receive unexpected pink slips. | Source: Tolga Akmen / AFP

On the flip side, if the transformation plan is executed properly, Deutsche Bank’s cost-income ratio is expected to drop to 70 percent by 2022 with chopped down costs coming to an average of around $19 billion.

This strategy will also implement a Capital Release Unit (CRU) which will see Deutsche return $5.6 billion worth of capital to its shareholders from 2022 through share buybacks. The CRU will “wind-down” the bank’s assets which are not in line with the new strategy.

The CRU will also receive around $83 billion of Risk-Weighted Assets (RWA) with the bank planning to reduce credit risk related RWA of the CRU to $11.2 billion by 2021.

In a blow to stockholders, the bank further revealed that it is looking at funding its new transformation strategy from within and consequently, it will not pay common stock dividends for the 2019 and 2020 financial years.

Explaining the motive behind these sweeping changes, CEO Christian Sewing said:

In refocusing the bank around our clients, we are returning to our roots and to what once made us one of the leading banks in the world. We remain committed to our global network and will help companies to grow and provide private and institutional clients with the best solutions and advice for their respective needs – in Germany, Europe and around the globe.

Deutsche Bank stock was last down 5.73 percent to $7.57.

David Hundeyin @DavidHundeyin

I am a busy Nigerian writer, journalist and writer with an interest in tech and finance. When I'm not contributing to CCN and traveling around Africa, you can catch me contributing to CNN Africa, or in the writers room at 'The Other News', Nigeria's weekly answer to 'The Daily Show' with nearly 2 million viewers. My work on 'The Other News' was featured in the New Yorker Magazine, and that was then cited in the Washington Post so I'm not sure that counts as a feature but I'll definitely mention it too! I have been nominated by the US State Department to take part in the 2019 Edward R. Murrow Program for journalists under the International Visitors Leadership Program. I also like hamsters. You can reach me on Twitter at _David_Hundeyin