Deutsche Bank's stock rallies as CEO Sewing's overhaul begins to pay off

CEO Christian Sewing's sweeping restructuring of Deutsche Bank AG appears to be paying off as the German banking group's shares have jumped by more than one-third since the beginning of 2021.

Sewing's overhaul, launched in July 2019, entailed downsizing the investment banking division and exiting equities sales and trading, among other measures, to achieve a return on tangible equity of 8% and €6 billion of cost cuts by 2022. The multiyear plan meant 18,000 job cuts globally.

On May 25, the bank's shares closed at €12.27 apiece, representing a year-to-date growth of more than 37%, S&P Global Market Intelligence data shows. This outperformed the 31.06% rise in the EURO STOXX Banks index over the same period.

Deutsche Bank got off to a strong start in 2021 after posting its first annual profit since 2014. Its investment bank booked revenues of €9.3 billion in 2020, up 32% from 2019, having benefitted from a COVID-19 pandemic-induced market rally for most of the year.

S&P Global Ratings revised its outlook on the bank to positive from negative shortly after, saying Deutsche Bank was effectively implementing the deep phase of its restructuring. The rating agency said it expects the overhaul's benefits to materialize over the following 12 to 24 months.

Fitch Ratings also revised Deutsche Bank's outlook to positive in January on the back of the progress in the restructuring's implementation.

The investment bank continued to buoy Deutsche Bank in the first quarter of 2021, posting net revenues of €3.10 billion. The figure marked a 32% year-over-year increase, beating then-Chief Transformation Officer Fabrizio Campelli's forecast of 20% growth. Berenberg analyst Eoin Mullany in a note lauded the bank for showing "more signs of progress."

Cautious outlook

Despite the positive momentum, analysts at CFRA noted that Deutsche Bank faces a tough revenue outlook this year amid lower-for-longer interest rates and subdued activity as economies recover from the pandemic. The recent improvement in the bank's other segments will be insufficient for Deutsche Bank "to pivot away" from the investment bank, where revenues are expected to normalize this year, CFRA added.

Berenberg's Mullany also flagged concerns about the bank's ability to defend revenues from the normalization of trading.

Sewing said during a first-quarter analyst presentation that 2021 investment banking revenues could reach the record levels of 2020, stating that a "substantial portion of our investment bank growth since 2019 is sustainable."

However, CFRA emphasized the restructuring's effects, saying a lower cost base and provisions for credit losses "should ensure an improved result in 2021."

In a speech published ahead of the bank's May 27 annual general meeting, Sewing said the restructuring's third phase has begun. This means Deutsche Bank will have to meet its ROTE target next year and resume shareholder returns. "We are convinced we can guide your Deutsche Bank towards sustainable profitability, largely because we are well positioned across all our businesses," the CEO said.

Sewing also hinted at a potential return to M&A, saying the bank must prepare to be an active participant in the wave of cross-border consolidation in European banking that "will happen sooner or later."

"Size is becoming even more important in the financial sector," Sewing said.