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Key Topics
Requirement
Advice on Proposed Strategy of Deutsche Bank
Solution
The strategy, announced on 29th October 2015, aimed to increase profitability and bring an overhaul in the operations of the bank. It aims to improve capitalization by reducing risk-weighted assets to 310 billion euros at the end of 2020. There has been a lot of speculation about the future of the bank and this move will be welcomed by the market. The bank will increase its focus on asset/fund management and transaction banking. It’ll float Postbank, its retail banking brand. The bank will invest in technology up-gradation, exercise a massive lay-off, and also exit several markets where it has low market presence. The anticipation of this announcement allowed the bank’s stock to jump up to 30%. Then it saw a drop of around 7% on 29th October which reflects discontent of the investors over certain aspects of the strategy. Investor dissatisfaction can be traced to the bank’s decision to eliminate dividend for 2015 and 2016 with a promise to maintain competitive dividend-payout-ratio from 2017. Interestingly, the bank has paid dividends routinely since its establishment in 1952. The cost-income ratio of the bank has been at a surprisingly high 180% which justifies the dividend cut to an extent.
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In its investment banking operations, Deutsche Bank aims to cut back its clientele by 50%. This is not as bad as one may think, especially considering that 80% of the bank’s revenue in investment banking is generated by less than 30% of the clients. So the non-core clients will be dropped off. This move is advisable as it enables the bank to secure most of the revenue while negating most of the risk.
On the global front, European banks have been worse off than the American banks. Despite poor earnings of the Deutsche Bank, there have been some speculations in the market about the future trend in the stock as the company has promised to overhaul its operation. As a result brokerage houses are bullish on the stock and analysts are advising to potentially ‘hold’ the stock for now. This is a good sign for the company and it is advisable that the company delivers on its promise. The bank is showing signs to become purposeful and disciplined in its operations which if held in context with the global economy is a good sign for the future. In the aftermath of the 2008 financial crisis, it has been difficult for banks to maintain a good standing in the market and the next 5 years will be crucial for Deutsche Bank.
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