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Deutsche bank strategy fails to convince as actions unclear

Deutsche Bank AG's plan to cut costs by selling Postbank and shrinking the securities business is leaving investors cold as the overhaul pushes back targets that management has failed to deliver.

[FRANKFURT] Deutsche Bank AG's plan to cut costs by selling Postbank and shrinking the securities business is leaving investors cold as the overhaul pushes back targets that management has failed to deliver.

The stock fell the most in Frankfurt trading since October after Germany's biggest bank lowered its profitability target under a new five-year plan announced Monday. The company didn't provide details of how it will achieve additional annual cost savings of 3.5 billion euros (US$3.8 billion) while it aims for a lower measure of financial strength than the current level.

Co-Chief Executive Officers Juergen Fitschen and Anshu Jain are under pressure from investors to outline specific actions to boost returns as part of their biggest revamp since taking charge three years ago. The shares have posted the worst performance among global peers during their tenure amid concerns about rising legal costs and weak capital buffers that were further eroded in the first quarter.

"The first plan didn't turn out how you had hoped," Stuart Graham, a London-based analyst at Autonomous Research LLP who has followed the stock for almost two decades, asked Deutsche Bank executives on a conference call. "The management team is pretty much unchanged. Why should we believe this team will deliver this time around when it didn't first time around?"

Mr Jain on the call disagreed and described the past three years as Deutsche Bank "re-earning its license to operate" by rebalancing its business mix and boosting capital.

Deutsche Bank shares dropped 4.6 per cent to 30.13 euros in Frankfurt, paring this year's gain to about 21 per cent.

The firm aims to achieve a return on tangible equity of at least 10 per cent in the medium term from 3.9 per cent in the first quarter, scrapping its previous profitability goal for at least 12 per cent return on equity in 2016.

The bank plans to reduce leverage by 150 billion euros at the investment bank by 2018 by cutting its businesses of long- dated uncleared derivatives and repos, while optimising rates, credit and the unit servicing hedge funds. The reorganisation will cost about 800 million euros to execute and will cut annual revenues by about 600 million euros, it said.

"This is a sensible, pragmatic plan," Christopher Wheeler, a London-based analyst at Atlantic Equities LLP, said in an interview with Bloomberg Television. "But it's still not one that's going to knock the cover off the ball."

Deutsche Bank plans to retreat from seven to 10 of the 70 countries in which it operates and close up to 200 branches, while spending as much as 2.5 billion euros on digital projects and on expanding its transaction banking as well as asset and wealth management units.

"We must remain client-centric, but focus more sharply on mutually attractive client relationships; remain global, but become more geographically focused; and remain universal, but avoid trying to be all things to all people," Mr Jain and Mr Fitschen said in a statement.

The bank aims to pay at least half of profit in dividends over three to five years, said Chief Financial Officer Stefan Krause.

"If I look at your historic cost savings plan, you don't really see that very well in the numbers," Kian Abouhossein, a London-based analyst at JPMorgan Chase & Co. said on the call. "How are you going to make sure that these targets that you set today will actually be achieved? Five years is a long time to achieve those."

Deutsche Bank said the additional cost savings of 3.5 billion euros will come on top of about 1.2 billion euros in remaining savings it plans to achieve this year from a previous program and a reduction of 3.3 billion euros in costs from reducing ownership of the Postbank consumer unit to a minority.

"There will be deep skepticism as to the delivery of the incremental cost savings and benefits from the investment spend," Omar Fall, a London-based analyst at Jefferies LLC, said on the call. "A cynic would say that you're announcing an additional 6 billion of expenses across the P&L today for very uncertain outcome if we look at the track record."

Deutsche Bank plans to purchase shares in Postbank it doesn't own before selling a stake in the company to the public and expects to deconsolidate the bank by the end of 2016. Mr Krause said he's not concerned about the prospects of listing Postbank.

The parent company said in a statement Monday that it asked Postbank to take "all necessary steps" to squeeze out minority shareholders, and that cash compensation will be announced after a valuation of the business.

After paying a record US$2.5 billion fine last week for rigging interest-rate benchmarks, Deutsche Bank posted first- quarter profit Sunday that beat analyst estimates, as debt and equity trading rose, pushing revenue to a near record.

Net income fell to 544 million euros from 1.1 billion euros in the year-earlier period, hurt by a 1.5 billion-euro charge for legal costs. Deutsche Bank's common equity Tier 1 capital ratio, a key measure of financial strength, fell to 11.1 per cent from 11.7 per cent at the end of 2014. Further headwinds are expected, the bank said.

Deutsche Bank said Monday it will target a common equity ratio of about 11 per cent in the medium term, while increasing its leverage ratio to at least 5 percent from 3.4 per cent at the end of March.

The CET1 target "still looks a bit light to me," said Alevizos Alevizakos, an analyst at Keefe Bruyette & Woods in London.

Mr Jain acknowledges errors were made in the past.

"There is no debate, we could have done more and delivered more value," Mr Jain said. "We feel that carrying a lot of optionality in our business model, and that was a conscious decision, proved to be a mistake."


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