Not many European banks boast a higher valuation today than one year ago. Deutsche Bank can; its price to tangible book of 0.4 times has jumped by more than half.
The lender’s high cost base legacy means it started from a low point. Another shadow looms — Deutsche’s connection to Germany’s largest accounting fraud Wirecard. Late Tuesday the bank announced that head of accounting Andreas Loetscher would step aside temporarily to deal with criminal investigations against him and ex-colleagues at his former employer, EY.
This sour note hardly helped the German lender trumpet its achievements at its investor day. Chief executive Christian Sewing emphasised how far the bank had come in 2020. But the problems of Mr Loetscher’s — with the bank since May 2018 — only highlight the fragility of the share price rebound.
Awkwardly, EY is Deutsche Bank’s current auditor. Links to the fraud-riddled payments group go further back. The lender made various loans to Wirecard from 2015 onwards. These loans were pulled as the Wirecard controversy began to bubble. But due diligence was plainly inadequate — uncomfortably so at a lender that claims to be low risk.
Where does Deutsche go from here? Mr Sewing began his tenure last year aiming to stabilise the investment bank’s earnings volatility and prune its high cost base.
Ironically investment banking has driven the rebound. The unit should make up 70 per cent of core bank earnings, adjusting for assets in run off, thinks Barclays. The centrepiece of Mr Sewing’s revamp, his newish corporate bank unit, comes a very distant second. In terms of capital allocation, investment banking will still receive the lion’s share at 45 per cent of tangible equity.
More than a year on and group cost cuts are under way. But targets are stuck. A 2022 goal of return on tangible equity, today below 1 per cent, has not budged from 8 per cent.
Deutsche Bank has travelled well in difficult times. Given the high beta to market movements, and the noise around Wirecard, shareholders will be sorely tempted to take some profits.
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