Deutsche Bank will have to stay on the treadmill

Deutsche Bank will have to stay on the treadmill
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This year’s prodigious income generation will be difficult to repeat next year, and even more so in 2023

Running a bench is more like a treadmill than a track. Deutsche Bank CEO Christian Sewing may reach his target of 8% return on tangible equity (ROTE) next year. But it will have to keep moving forward. Your next challenge will be to maintain those returns and eventually bring them closer to the lender’s likely 10% cost of equity.

Sewing’s ROTE 2022 target is the centerpiece of its turnaround strategy for the old basket case, which was in deficit when he took office in 2018. The bank estimates that reaching the target requires 25 billion euros of annual revenue, which That always seemed like an exaggeration.

Wednesday’s results show that it is no longer impossible. Deutsche reached the required revenue level in the 12 months to the third quarter of this year. That means Sewing just has to keep the top line stable, while making sure cost cuts occur as planned, to declare mission accomplished.

However, this year’s prodigious income generation will be difficult to repeat. Sewing’s investment bankers made 9.6 billion euros of revenue in the last 12 months, thanks to a boom linked to the pandemic in the trading debt, mergers and acquisitions, and debt and corporate equity issues. If all other divisions perform as analysts expect next year, Sewing needs that figure to remain above € 9.4 billion, according to our calculations, using consensus estimates prepared by the entity.

This may be the case next year, if the central bank rate hikes lead to a further rise in interest rates. trading bond, but 2023 is another matter. The investment bank only made 7 billion euros of revenue in 2019, when markets were calmer.

Even if Sewing hits 8%, and convinces investors that it is more than a fluke, it has more work to do. Given that Deutsche’s cost of equity is probably around 10%, the bank would continue to destroy shareholder value. That means more job cuts, on top of the 13,000 cut since early 2018. You might also have to reconsider the cost-saving merger with rival Commerzbank, which they both scrapped in 2019. In other words, success can take Sewing further away, but leaving him in an eerily familiar position.