Christian Sewing emphasizes the importance of “predictability and consistency” for Deutsche Bank. Over the last 15 years, the bank has faced a tumultuous history marked by missteps. Recently released annual results, however, indicate ongoing concerns that could hinder its progress.
Sewing has made significant strides in repositioning Deutsche Bank following years of excessive growth and poor management. Since hitting a low in 2020, the bank’s shares have nearly quadrupled. Yet, the latest income statement revealed challenges with predictability, contributing to its lower market valuation compared to competitors.
The bank’s profits suffered a 92% decline in the fourth quarter, impacted by one-off costs such as legal fees. Additionally, it has revised down its cost targets for 2025 while highlighting its reliance on trading activities for revenue generation.
Currently, nearly one-third of Deutsche’s revenue is sourced from its fixed income and currencies (FIC) division, which has performed well due to market volatility. Factors like political changes in the US, budget challenges in the UK, and an upcoming general election in Germany are likely to sustain this momentum into 2025.
However, investors remain cautious about trading income, perceiving it as less stable and more capital-intensive compared to wealth management. This concern partly explains why Deutsche Bank is valued at only 0.6 times its tangible book value, compared to UBS’s valuation of 1.5 times, supported by its expansive wealth management division.
While Deutsche Bank has moved away from its ambitions to become “Europe’s Goldman Sachs,” it faces similar challenges to those experienced by Goldman regarding reliance on trading segments. Goldman Sachs’ focus on FIC has made it difficult to bridge the valuation divide with firms like Morgan Stanley and JPMorgan Chase, which possess substantial wealth management operations.
Goldman Sachs is adopting a dual strategy to diversify its revenue streams and mitigate concerns around trading volatility. Similarly, Deutsche Bank is emphasizing the stability of a portion of its FIC revenues that derives from client credit extensions, referred to as “financing.”
Sewing stated that 2025 will be a critical year for Deutsche Bank, marking a pivotal moment for assessing the effectiveness of its turnaround initiatives. However, it will require more than a single year for investors to be convinced of the bank’s newfound predictability.
photo credit: www.ft.com
