Deutsche Bank strategic plan meets with scepticism

Deutsche Bank might have pulled off what many thought was impossible: a strategy to secure its position as Europe's only global investment bank, deal with its bloated cost base and become one of the continent's best capitalised lenders.

On the other hand, the bank's long-awaited five-year strategic plan is short in detail and analysts said it could go either way. Investors and analysts will have to wait another 90 days for more clarity on the plan as Deutsche irons out the finer points.

While the sale of the sluggish Postbank retail business and a €130-€150bn reduction in investment banking assets dominated headlines ahead of the announcement, the main focus on Monday was Deutsche's future earnings, which it plans to boost through €3.5bn of cost savings.

"When it comes to cost savings, the devil is in the detail, there was very little detail [from Deutsche]," said Kinner Lakhani, banks analyst at Citigroup, blaming the lack of clarity around costs cuts for the 4 per cent fall in the bank's share price after Monday's morning announcement.

"We have at this point obviously not completed a bottom-up plan," Stefan Krause, Deutsche's finance boss, told analysts. "We will obviously now, as the next step, plan in detail with our different divisions."

Jon Peace, banks analyst at Nomura, told the Financial Times: "Given the record of investment banks on costs, none of us [analysts] are really modelling that [the €3.5bn savings] in right now, we'll wait to see proof of delivery."

Deutsche's ability to revamp its investment bank was met with less scepticism. Citi's Mr Lakhani said the planned €200bn divestment of investment banking assets had relatively low execution risk since Deutsche is selecting areas such as long-dated derivatives and prime brokerage, which rivals have already targeted and managed to make cuts in.

The bank is keeping the flexibility to invest €50 to €70bn in more promising areas of the investment bank, and identified equities and corporate finance as areas with development potential. Overall, Deutsche will become less reliant on capital-intensive activities and less exposed to fixed income, which has dominated its investment bank, two developments investors are glad to see.

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The sale of Postbank is also seen as a straightforward way of improving Deutsche's earnings profile and capital position, especially since the bank favours a stock market flotation which it said carries less risk than an auction.

Deutsche says the sale of Postbank, the investment bank changes and investments of up to €1bn in technology and more than €1.5bn in its asset and wealth management and global transaction divisions would create a more balanced, profitable group.

Anshu Jain and Jurgen Fitschen, the co-chief executives, said they were confident that, as a result of the changes, by 2020, Deutsche would be "be better capitalised and less leveraged; more cost-efficient; well-funded [and] more value-creating for shareholders".

The rub is that even if everything goes according to plan, the bank will have an after-tax return on tangible equity above 10 per cent in the medium term, an ambition described by analysts at Barclays as "disappointing". Return on equity in the mid teens was the norm pre-crisis.

Deutsche's return on equity target is lower because of the bank's other big strategic decision - to hold more equity than it needs to. It wants to have €5 of equity for every €100 of loans, or a leverage ratio of 5 per cent, even though regulators are expected to ask European banks to hold less than 4 per cent.

"Deutsche has finally accepted they need more leverage capital - like all their peers - but it means lower returns, unless they can radically reduce costs," said Huw van Steenis, banking analyst at Morgan Stanley.

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