Deutsche Bank is banking on increased cost reduction, better-than-expected performance from its revitalized investment bank and higher leverage as it “goes from defense to offensive,” according to its chief executive.
Christian Sewing, who launched a radical restructuring of Germany’s largest lender in July 2019, told investors on Wednesday that he was on track to generate a tangible 8% return on equity by 2022 and to make 5 billion euros of capital to shareholders in the following years.
It comes as Deutsche revised upward several of its financial targets, after recovering third-quarter profits for the first time since early 2019. Shares of the German lender, which have risen more than 40% this year, have increased by 1% on Wednesday at midday.
“In the first nine months of 2020, we achieved 8% year-over-year revenue growth in the main bank,” Sewing said in a statement ahead of Capital Markets Day. the Frankfurt-based bank on Wednesday. “This positive momentum continued in the fourth quarter.”
Deutsche now predicts that investment bank revenues will grow by around 3% per year between 2018 and 2022, up from a previous target of 2%.
“A significant portion of the revenue improvement achieved by the investment bank in 2020 is expected to be sustainable,” said James von Moltke, CFO.
As part of the most radical strategic overhaul in decades, Deutsche decided in 2019 to pull out of equity trading and get rid of around € 280 billion of unwanted assets. This year, the remaining operations of its investment banks, which focus on bond and currency trading, have regained market share and have exceeded analysts’ expectations.
Deutsche also reinforced its cost reduction target for 2022 by 300 million euros on Wednesday. It now aims to reduce adjusted costs by 2.8 billion euros over the next two years to 16.7 billion euros, from a previous target of 17 billion euros.
“The Covid crisis has highlighted potential for further savings – especially in light of our office space and travel costs,” Sewing said.
Last month, Moody’s removed a negative outlook it had placed on the bank’s credit rating, saying it had moved to a more solid strategic footing. The improvement in performance this year was mainly attributable to surging sales and trading revenues, which climbed 47% in the third quarter.
“The increased use of investment banking makes less predictable, but more cost action is positive, ”said Anke Reingen, analyst at RBC Capital Markets.
Although optimistic about the outlook for its investment bank, Deutsche has become more cautious about the outlook for its corporate bank, which it now expects to grow by just 1% per year instead of 3%. Deutsche has confirmed its 2022 overall revenue target of around 24.4 billion euros, against analysts’ estimates of 22.5 billion euros.
The lender is also willing to operate with higher debt by lowering its 2022 target for the leverage ratio – a key indicator of balance sheet strength – from 500 basis points to 4.5% of assets. Deutsche pointed out that the lower leverage ratio still sits “comfortably above” the 2023 minimum regulatory requirement of 3.75%.