Deutsche Bank is relying on increased cost-cutting, a better than expected performance of its revitalised investment bank and higher leverage as it is “switching from defence to offence”, according to its chief executive.
Christian Sewing, who kicked off a radical restructuring of Germany’s largest lender in July 2019, told investors on Wednesday that it was on track to generate a return on tangible equity of 8 per cent by 2022 and to give back €5bn of capital to shareholders. It plans to resume dividend payments in 2022.
It came as Deutsche revised upwards several of its financial targets, after returning to profit in the third quarter for the first time since early 2019. Shares in the German lender, which are up more than 40 per cent this year, rose 1 per cent in midday trading on Wednesday.
“In the first nine months of 2020 we achieved year-on-year revenue growth of 8 per cent in the core bank,” Mr Sewing said in a statement ahead of the Frankfurt-based bank’s capital markets day on Wednesday. “This positive momentum has continued into the fourth quarter.”
Deutsche now expects that investment banking revenues will rise about 3 per cent a year between 2018 and 2022, compared with a previous goal of 2 per cent.
“A sizeable portion of the revenue improvement the investment bank has achieved in 2020 should be sustainable,” said James von Moltke, chief financial officer.
In the most radical strategic overhaul in decades, Deutsche in 2019 decided to pull out of equities trading and hive off about €280bn in unwanted assets. This year its remaining investment bank operations, which focus on bond and foreign exchange trading, regained market share and performed ahead of analysts’ expectations.
Deutsche on Wednesday also stepped up its 2022 cost-cutting goal by €300m. It is now aiming to cut adjusted costs by €2.8bn over the coming two years to €16.7bn, compared with a previous goal of €17bn.
“The Covid crisis has highlighted additional savings potential — especially in view of our costs for office space and travel,” said Mr Sewing.
Moody’s last month removed a negative outlook it had placed on the bank’s credit rating, saying it had progressed to a firmer strategic footing. The improved performance this year was mainly driven by surging sales and trading revenues, which climbed 47 per cent in the third quarter.
“The higher reliance on investment banking makes [meeting the 2022 targets] less predictable, but more actions on costs are positive,” said Anke Reingen, an analyst with RBC Capital Markets.
While optimistic about the prospects for its investment bank, Deutsche has become more cautious about the outlook for its corporate bank, which it now expects to grow by just 1 per cent a year instead of 3 per cent. Deutsche confirmed its overall 2022 revenue target of about €24.4bn, compared with analyst estimates of €22.5bn.
The lender is also willing to operate with higher debt as it lowers its 2022 target for the leverage ratio, a key indicator of balance sheet strength, by 50 basis points to 4.5 per cent of assets.
This is partly driven by Deutsche’s decision to scale back its plans to hive off unwanted assets after missing its 2020 reduction target by some €30bn. The lender now expects to sit on unwanted assets of €51bn by the end of 2022, compared with the previous target of just €10bn. Mr von Moltke said that Deutsche realised that keeping those assets was “more economically rational” than divesting them.
Deutsche stressed that the lower leverage ratio still stands “comfortably above” the 2023 regulatory minimum requirement of 3.75 per cent.
This article has been amended to show the correct reduction Deutsche Bank is aiming for in its leverage ratio.
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