still has one very simple problem: Its revenues are falling faster than its costs.
Behind the noise of restructuring charges, regulatory change and the costs of the U.S. tax overhaul, this is the reason investors arenât prepared to value the German banking giantâs stock any more highly.
Chief Executive
John Cryan
has achieved a lot in re-educating a bank long used to deluding itself over the changes it needed to make. He has settled investigations, got out of risky countries and is investing in the technology that can help the bank escape its history of ill-disciplined empire building.
But he feels this good work is unrecognized. He complained during the bankâs 2017 results on Friday that investors didnât value the bank on its future potential. In response, the stock dropped as much as 7% in morning trading.
Alas, its problem stands: Deutsche Bank is simply too big for the business it does and the issue appears to be getting worse. Its three core businessesâinvestment and transaction banking, retail and commercial banking and asset managementâhave collectively lost âŹ5.6 billion of revenue between 2015 and 2017. In the same period, its core cost baseâexcluding all the penalties for bad behavior, restructuring costs and so onâhas fallen just âŹ1.1 billion.
Deutscheâs investment bank, which still represents more than half its revenue, is the main culprit and accounted for most of the revenue losses. But it still reinstated bonuses in 2017 to keep bankers, many of whom got little or nothing for 2016.
The ratio of costs to income from these three businesses (excluding central costs) is more than 88%. Comparing it with
may be unfair, but just for the sake of it the U.S. bankâs ratio is more like 56%. Deutsche may never get quite that low, but it is too far off the pace.
Deutsche says it wonât cut costs more radically: That could just mean losing even more business. Its solution is to rebuild revenue. Part of that is just waiting (and hoping) for market activity to improve and interest rates to rise.
But this may not be enough. An increase in European interest rates of 1 percentage point would lift revenue by âŹ1.4 billion in the first year. In 2017, that would have lowered its cost to income ratio to 83%âstill very unhealthy.
But another thing holds back its attempts to rebuild revenue: a poor reputation. The bank is still seen by regulators and clients as complex and risky. That means its funding costs remain highâmaking it more expensive to do business withâand forces it to be more conservative than rivals in the some of the business it tries to win.
The problem with a reputation is that it takes a long time to restore. Deutsche Bankâand its sharesâremains stuck in a place that is very hard to escape.
Write to Paul J. Davies at paul.davies@wsj.com
