Deutsche Bank needs strategy turn as goals unrealistic, says JPMorgan

Deutsche Bank should offer shares in its asset-management unit to the public rather than selling consumer lender Deutsche Postbank because it’s the more efficient way to improve capital levels, according to analysts at JPMorgan Chase & Co.
The investment unit would deliver better value than a discounted Postbank sale as the German lender tries to ease capital concerns, analysts Kian Abouhossein and Amit Ranjan wrote in a note on Thursday. Deutsche Bank’s profitability goal also “looks unrealistic” given its current revenue and more cost cutting is needed, they wrote.
While parts of the bank’s strategy, including simplifying operations and cutting costs, are still relevant, “we think other elements do not reflect the new reality Deutsche Bank faces,” the analysts wrote.
Chief executive officer John Cryan inherited much of the bank’s strategy from Anshu Jain when he replaced the former investment banker in 2015. While Cryan has focused on improving internal controls and scaling back capital-intensive debt trading businesses, some investors and clients aren’t convinced. Deutsche Bank lost market share in the fourth quarter as mounting legal costs fuelled concern about its financial strength.
“We do from time to time consider how we best engage with asset management,” Cryan told reporters earlier this month. “We have nothing to announce; that doesn’t mean we will never have anything to announce in relation to anything, but it remains an absolutely core business for us.”
The sale of Postbank at a 70% discount to tangible book value would add about 40 basis points to Deutsche Bank’s common equity Tier 1 ratio, the analysts wrote. The sale of a 25% stake in the asset-management unit could achieve about the same increase next year at the “better valuation” of 12 times annual earnings, according to JPMorgan.
Deutsche Bank’s CET1 ratio, a key measure of its financial strength, stood at 11.9% at the end of December. Cryan wants to raise the ratio to at least 12.5% by the end of next year. Chief financial officer Marcus Schenck told analysts this month that the company would only sell Postbank “if it gives a meaningful capital relief” and won’t accept a “major writedown.’’ Others don’t think Deutsche Bank’s asset sales go far enough. The company will probably raise as much as €8bn ($8.5bn) by issuing shares, James Chappell, an analyst at Berenberg, wrote in a note on Wednesday.
Deutsche Bank will probably generate a return on tangible equity of 6.4% next year, meaning it needs to either lower its 10% target for that year or “materially” increase its cost-savings plan, according to JPMorgan.