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Key takeaways from Deutsche Bank's investor day 2019

Five months into its latest restructuring, Deutsche Bank AG is "fully on track" to meet its near-term revenue and cost targets without asking shareholders for additional capital, CEO Christian Sewing told analysts.

"We can assure you that we will maintain a robust and healthy balance sheet because we all believe that is actually the foundation for long-term, sustainable, profitable institution," Sewing said during a presentation at the bank's annual investor day Dec. 10.

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Deutsche Bank will maintain a healthy balance sheet, according to CEO Christian Sewing.
Source: Deutsche Bank

Apart from revenue, costs and capital, Deutsche's senior executive team had to address questions about the impact of the negative rate policy on corporate and private client deposits in a lower-for-longer environment, and future drivers of volume growth across divisions.

Push-pull for cost, revenues

Sewing reaffirmed group guidance for an adjusted cost base of €17 billion and group revenues of some €24.5 billion by 2022. Year-end costs are seen at €21.5 billion, excluding the impact of the transfer of the bank's prime finance operations to BNP Paribas SA and taking into account restructuring charges. Deutsche has achieved almost half of the savings needed to hit its €19.5 billion cost target for 2020, Sewing said.

Cost reductions in 2018 and 2019 have harmed revenues as the bank's business footprint has shrunk. "But these reductions are now largely completed," Sewing said.

Deutsche is now more optimistic about revenues in 2020 than at the launch of its new strategy in July when it guided for €22.8 billion revenues next year, CFO James von Moltke said. However, if some of the expected revenue growth is not achieved, the bank would "absolutely want to do more on the cost side," he noted.

It is too early to think about reducing the €17 billion cost target given that the bank still has levers it can pull, he said. The two units where he sees future cost savings potential are the capital release unit, holding the group's noncore operations, and the private and retail bank, where the integration of Deutsche Post is expected to deliver €200 million in cost synergies.

Europe 'finally waking up'

Deutsche Bank expects to keep its common equity Tier 1 ratio above 13% in 2019 and will maintain a ratio above 12.5% by 2022 while using its own capital resources to finance the restructuring, Sewing said. Shareholders can also expect dividends from 2022, he said.

The group recently received relief on regulatory capital after the Financial Stability Board cut its surcharge for global systemically important banks to 1.5% from 2% previously, which will cut Deutsche's leverage ratio requirement to 3.75%. The ECB has also reduced the minimum CET1 ratio requirement for the lender by 25 basis points to 11.59% from Jan. 1, 2020.

Sewing views the cuts as a vote of confidence. "We are grateful that the regulators are crediting us for the changed business mix, for the clear structure and strategy," he said.

A potential delay in risk-weighted assets inflation as a result of upcoming regulatory measures could push some of the capital headwinds further down the line, Von Moltke said. The expected €25 billion in RWA inflation expected from the fundamental review of Deutsche's trading book is now more likely to come in 2024 rather than 2023 as initially expected, the CFO said.

There is still some uncertainty about the implementation of the final Basel III capital requirements, Von Moltke said. The adoption of the final rules, including an output floor — one of the most controversial parts of Basel III — which would limit the extent to which banks use internal modeling to assess credit risk, is currently under discussion on both sides of the Atlantic.

The debate, especially among European regulators on how to transpose the output floor on a national level, is a positive signal, Sewing said. "Europe is finally waking up to the implementation and to the recalibration and to the final rule setting," he said.

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James von Moltke said there is still some uncertainty about Basel III implementation.
Source: Deutsche Bank

Interest rates

While also affirming the return on tangible equity target of 8%, Sewing said external conditions have become more challenging, "mainly because of lower interest rates," as both the ECB and the U.S. Federal Reserve have cut their benchmark interest rates.

The bank has acted swiftly to address the rate-related pressures, which are especially harmful for its retail and core bank units. "We have started passing to corporate and high-net-worth clients and making use of the ECB deposit-tiering scheme," Sewing said. The bank is also advising corporate clients to switch from deposits to higher-yielding investment assets, he said.

Revenue growth and asset repricing are also expected to alleviate some of the rate-related burden, Manfred Knof, head of the group's retail division, and Stefan Hoops, the core bank unit chief, said.

There are no plans currently to pass on negative interest rates to "small value depositors," Von Moltke said.