Why the Deustche Bank restructuring plan doesn’t look to add up

Russ Mould
5 July 2019

“The 16% increase in Deutsche Bank’s shares over the past month makes a pleasant change from the multi-year grinding decline that leaves them at barely €7 (compared to their 2007, pre-crisis peak of €112) and suggests that investors are prepared to give new chief executive officer Christian Sewing’s restructuring programme a chance,” says Russ Mould, AJ Bell Investment Director. “However, there is one thing – at least – which does not add up when you look at the reported plan to spin off a ‘bad bank’ that will have €50 billion of assets. Deutsche Bank has a market capitalisation of €14.5 billion, covering its investment, private and commercial banking activities, as well as the asset management business, €187 billion in cash and €54 billion in financial assets. If investors currently think all of that merits a valuation of just €14.5 billion, why should the putative ‘bad bank’s’ assets be worth anything like €50 billion, regardless of what their official ‘book value’ may be?

“What is therefore unclear is the cost to Deutsche Bank of spinning-off and then winding down these unwanted assets which, according to reports, are mainly long-term derivatives (and those costs come before the expenditure and cash outlay that would come with any substantial reductions in headcount).

“In 2012 the bank took a €4 billion restructuring charge under Juergen Fitschen and Anshu Jain and in 2015 then chief executive John Cryan oversaw a €3.5 billion restructuring charge. Deutsche Bank ended up with a rights issue each time, raising over €16 billion across the two deals, in 2014 and 2017.

“History (and the lowly valuation attributed to Deutsche’s assets by the market) suggests another capital raise could be on the cards, at some stage even if it would be very dilutive to existing shareholders at a price anywhere near €7 – and the 2017 deal under Mr Cryan came at a 35% discount. Even that discount did not help out those who invested in Deutsche then, as they bought those new shares at €11.75 apiece and the shares are down by nearly 40% since then. You would have thought that taking such a bath on the stock would make investors think twice if Deutsche Bank does come back, cap in hand, to fund its latest attempts to turn itself around, especially as the 2014 deal was priced at €22.50.

“There is a German money laundering investigation still pending but Deutsche may at least be over the worst in terms of litigation risk, after 2016’s $14 billion settlement with the US Department of Justice, and customer deposits have increased from €553 billion to €575 billion over the past two quarters to provide it with a steady source of funding. But investors are likely to remain sceptical of the restructuring plan given how the numbers don’t seem to add up, the ultimate failure of the 2012 and 2015 cost-cutting initiatives to help the share price and the losses suffered by those who backed the 2014 and 2017 capital raisings.”

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