Deutsche Bank must deliver results to convince market of cost targets

Deutsche Bank AG must work to convince investors that its ambitious new cost goals are achievable.

The German lender recently unveiled a fresh annual cost target of €20 billion, with CEO Christian Sewing saying he was confident a quarterly run rate target of €5 billion would be reached as early as the first quarter.

Company-compiled consensus estimates, however, suggest the bank will incur €5.15 billion of costs in the first quarter of this year. Deutsche Bank is also projected by analysts to miss the €20 billion target in 2024, 2025 and 2026.

Deutsche Bank's earnings reports show the lender has been unable to establish a consistent trajectory on costs over recent years. It must show it can deliver "cleaner" earnings in the future as there are still many "moving parts on the cost side" for now, Morningstar DBRS credit analyst Sonja Forster previously told S&P Global Market Intelligence.

Executives said during Deutsche Bank's most recent earnings call that they have the tools to achieve cost targets, and a "clear path" was already in sight. The lender intends to slash 3,500 jobs, mainly in non-client-facing roles, and achieve about €300 million in savings from simplified workflows and automation.

The bank booked noninterest expenses of €21.7 billion in 2023, up from €20.39 billion the year prior. The increase was partly influenced by inflation and additional investments, €400 million of which are nonrecurring, the bank said.

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Deutsche Bank's cost-to-income ratio — an efficiency metric showing operating expenses as a proportion of revenue — has been higher than that of its peers in Europe for some years now, hitting 74.3% for 2023.

With the new €20 billion cost target, plus a revenue goal of €32 billion, Deutsche Bank aims to improve its cost-to-income ratio to 62.5% in 2025.

Markets, however, are skeptical about Deutsche Bank's targets. The cost-to-income ratio target was ambitious, JPMorgan analysts said in a February note, adding that they would wait for the bank to show progress in the next few quarters before giving the benefit of a lower forecast.

Autonomous analyst Stuart Graham echoed that view, telling The Wall Street Journal in February that the bank still needs to "keep delivering over and over to convince investors."

Although consensus estimates indicate the cost-to-income ratio will improve in the coming years, the 69.5% result forecast for 2025 is still substantially above the bank's target.

A Deutsche Bank representative did not comment, and only pointed to executives' remarks during the earnings call. The bank is scheduled to report first-quarter earnings April 27.