After ten very difficult years, in which its existence was even briefly at stake, Germany’s most important credit institution is finally making billions in profits again. The conversion is on the right track, but not all construction sites are closed yet.
The twin towers of Deutsche Bank in the twilight: The institute has two and a half long years of transformation behind it.
Deutsche Bank is fulfilling the promises it made in July 2019 – at least to a large extent. Germany’s largest bank is progressing as planned step by step with the restructuring that was initiated at the time. It is one of the largest conversions in recent decades, giving the bank a new profile. In the two Corona years 2020/21, however, the institute also benefited, like all banks, from the extensive state aid for companies, which ensured a low rate of loan defaults.
The results of the transformation are now impressive: In the last financial year, the institute achieved a pre-tax profit of 3.4 billion euros (previous year: one billion); this is her best result in ten years. The same applies to the profit after tax of 2.5 billion euros (624 million). On the Frankfurt Stock Exchange, the bank’s stocks reacted by midday in an overall weaker market with a plus of five percent.
Bad bank again with billions loss
However, the good result has to be put into perspective insofar as Deutsche Bank has had ten very difficult years. In the period from 2015 to 2019, the institute did not make it into the profit zone, but made cumulative losses of a good 15 billion euros, with the survival of the bank being at times in question. Luckily for the institute and for the internationally well-connected German economy, those times are now over. Many companies value a globally active bank – or at least an investment bank – from their own country that supports them in their foreign activities.
The often reviled and unpopular investment banking was less decisive for the success in 2021 than in the previous year, in which the unit had made three times as much profit as the three other core units of the new Deutsche Bank. In addition, it weakened in the final quarter, as with other banks.
But last year, with a pre-tax profit of 3.7 billion euros, the investment bankers still achieved a net profit that was almost twice as high as that of the corporate bank (1 billion), the private customer bank (366 million) and asset management (816 million) together. The numbers reflect the attractiveness of investment banking, albeit highly volatile and prone to bad business practices.
However, one has to take into account that the unit for releasing capital (CRU), which was also created in mid-2019 and is a kind of bad bank within the institute, made a loss of 1.4 billion euros. That was significantly less than in the two previous years, in which a minus of almost 5.4 billion was incurred. But what’s happening in this unit builds heavily on previous investment banking-related businesses that the bank is exiting.
Achleitner gets a good finish
With the good result, the management does not give its long-time chairman of the supervisory board, Paul Achleitner, a glamorous, but a reasonable and probably satisfactory departure. The Austrian, who has been well connected in the German economy for decades, is leaving his post in May after ten years as the bank’s chief supervisor.
He is followed by the Dutch insurance expert Alexander Wynaendts, who is largely unknown in Germany. He spent most of his career with the Dutch insurance group Aegon, where he served as CEO from 2008 to 2020. When he moves into Frankfurt’s twin towers, he will find a bank that is now reasonably tidy.
Things looked different in the middle of the last decade. At this time, Deutsche Bank was increasingly getting into trouble. After a long period of wasting away, the management finally plucked up courage in mid-2019 and initiated a far-reaching restructuring. She said goodbye to parts of investment banking, such as stock trading and parts of the interest business, made changes to the board, created a new business unit with the corporate bank and committed to massive cost reductions and the reduction from 18,000 to 74,000 full-time positions by 2022 Aim.
Shareholders should benefit again
Deutsche Bank has now achieved many of the goals or is well on the way to achieving them. The only things that could be desired are the costs and the employees. At the end of 2021, the institute still had almost 83,000 employees, just over 1,000 fewer than in the previous year. In the meantime, however, the management has conceded the goal of a maximum of 74,000 full-time positions and is no longer aiming for an exact number with regard to the bank’s employees.
The cost-income ratio, a key figure that is widely regarded in the industry, is still at a high 85 percent. It is expected to drop to 70 percent next year. In particular, the corporate and private customer banks continue to achieve very high values with rates of 81 and 90 percent, while the investment bank and asset management each have a solid rate of 61 percent. Accordingly, CEO Christian Sewing and his team should know where to start in the coming quarters.
Nevertheless, Sewing is proud of the development so far. The bank has almost completely weathered the expected costs of the transformation and all four business areas are developing as planned or better. The bank is also making faster progress than expected when it comes to reducing old portfolios. As previously announced, Sewing is aiming for a return on tangible equity of 8 percent for 2022 and wants to distribute money to shareholders again this year.
“Bonuses” versus distributions to shareholders
A dividend of 20 cents per share and a share buyback program of 300 million euros are planned. A total of 700 million euros should flow back to the shareholders. At the same time, the variable remuneration paid out – understandably given the good figures – will continue to rise, according to observers to well over two billion euros. Whether this “bonus” sum is in a reasonable relation to the distributions to the shareholders could certainly be discussed in detail.
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