Many investment strategies optimistically promise a hockey-stick-shaped uplift in returns in the final years.
transformation is no exception: After 2½ years of steady progress, management is promising an astonishing 2022.
Last year’s profit was the highest in a decade for the German lender, prompting €300 million of share buybacks, equivalent to $337 billion, and €400 million in dividends. On Thursday management outlined a 2021 performance much in line with U.S. rivals: strong revenue growth with profits flattered by loan-loss reversals and tempered by cost inflation. That leaves the bank with a long way to run to meet its two key 2022 targets: Return on tangible equity (ROTE) of 3.8% last year compares with an 8% goal for this year, while its cost-to-income ratio of 85% was well short of the 70% mark. A share-price rise of 5% in early European trading seems generous.
Chief Executive Christian Sewing and Chief Financial Officer
James von Moltke
have delivered 2½ years of relatively drama-free performance improvement—no small achievement given Deutsche Bank’s rocky history. But they will need to up the pace this year, and the latest results also exacerbate concerns that the lender remains overly reliant on the volatile business of investment banking. Last year it replaced its 2022 total cost target with a cost-to-income one, which it duly missed this year partly because of rising pay in its investment bank.
The investment bank’s active role in the industrywide war for talent did show gains in the form of market share. Meanwhile, corporate and private banking revenues haven’t moved much. Mr. von Moltke says the bank has now repriced many deposits to cope with negative interest rates, which are expected to persist in Europe for a while yet.
Overall, the group results are far short of where they need to be. An end to the transformation plan, the costs of which are almost completely booked, should add about 2% to ROTE, says Mr. von Moltke. His plan to bridge the remaining ROTE gap is broadly a 1% uplift from higher revenues and 2% from additional operating-cost cuts. Deposit repricing should help the private and corporate banks and more job cuts are expected. However, it will be difficult to grow investment-banking revenues and cut costs if competition for talent remains intense even as capital markets normalize.
The shares do offer investors a lot of potential upside, trading at a significant discount to European peers, let alone better-valued Wall Street rivals. But the realization of that value will require management to progress from their previous mode of steady improvement to a new level. A lot needs to go right for Deutsche Bank in 2022.
Write to Rochelle Toplensky at email@example.com
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