Even with the most optimistic resolution of the current crisis, Germany’s biggest lender is a long way from profitability
By Rochelle Toplensky
The time to buy back Deutsche Bank DB -1.51%▲ must be drawing closer, but it isn’t here yet.
Investors are understandably ambivalent about Germany’s biggest lender in the coronavirus crisis. It is one of Europe’s most fragile banks, with high leverage and a sweeping overhaul of its operations under way—not a great place to be when large parts of the global economy are no longer generating cash.
Yet it is also disproportionately exposed to the big European economy that seems to be suffering least from Covid-19.
This helps explain why Deutsche Bank stock hasn’t been punished as much as might be expected as investors factor a very sharp global recession into their forecasts. It has lost about two-fifths of its market value since mid-February, in line with the wider European banking sector.
The German giant is nearly one year into a three-year restructuring plan. Last summer it promised to refocus on core capabilities, reduce costs, dispose of bad assets and cut 18,000 jobs. Its annual results showed decent progress.
This year, though, there is a risk that lockdowns could derail plans to invest in technology and rightsize its German retail operations, both of which are expected to reduce head count.
Layoffs in the midst of a global health pandemic could prove even more unpopular than they usually do. Last month, HSBCsuspended 35,000 layoffs it had planned as part of its own restructuring.
Deutsche Bank has instead suspended communicating about its layoffs, even as negotiations continue with the powerful German employee works councils. Those traditionally take a long time, and the timing of cuts penciled in later this summer could slip if the German lockdown lasts past May. So far the lender has trimmed head count by about 4,100.
On the plus side, the need to enable most employees and clients to work from home has accelerated the development of some connectivity and contingency systems. Levels for regulatory capital seem on target, and nearly half of the €2 billion cost reduction targeted for 2020 was already locked in last year.
Beyond the restructuring, a long lockdown would create significant loan losses. Here, though, Deutsche Bank’s home turf may help. Berlin took quick action to counter the impact of shutdowns—a €750 billion ($814 billion) monster stimulus amounts to over a fifth of the country’s annual output—and would likely step in again if needed.
Germany’s death rate has also been relatively low and many of its businesses continue to produce after acting early on lessons learned in their Chinese factories.
Deutsche Bank’s shares are still among the cheapest in the European banking universe, trading on around a quarter of tangible book value. Bond investors also seem worried: The cost of insuring against the lender’s default using a credit default swap has spiked in the past two weeks, markedly more than rivals.
The bank’s real problem is less the coronavirus than its own persistently weak margins in Europe’s tough banking environment. Even with the most optimistic resolution of today’s economic crisis, Deutsche Bank still has a lot more work to do.
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