Deutsche Bank: Understanding the Fundamentals of Strategy
- Forward Thinking
- Oct 30, 2019
- 3 min read
Part of this blog, and I guess this website as a whole, is to bring a different lens and perspective to life, micro and macro. While I do not have the strongest background in finance (A highly macro subject), the blog's purpose includes shedding light into different sectors of the economy.
This is where analyzing Deutsche Bank (Which just reported actual losses that are larger than expected) comes in.
History
Deutsche Bank, located in Germany, is one of the nation's largest lenders and one of the most influential non-governmental banks to stem from Europe. For the majority of the 2013-2019 period, the once giant bank has been in free-fall:
1. Declining Revenue
2. Failed Expense Cutting Measures
3. Downgrade in Firm's Long-Term Debt Rating: BBB+ to BBB
The downgrade is “very much driven by business model and the ability of the business model to generate better returns. They are making progress, but it’s protracted.”
- Frankfurt-based Fitch analyst Patrick Rioual
4. Increase in the Cost of Capital
5. Lack of Singularity in the IT Department a.k.a Creating Major Inefficiencies (Turns out they recently thought about creating a Management Board position in charge of technology, data, and innovation. Like what? How is this possible?)
"People at Deutsche loved setting up little groups to create their own mini-platforms for developments," he says. "For example, you'd have one platform that had been set up by the exotics guys and then someone else would come along and say they liked that, but wanted their own functionality. They'd go off and make 'enhancements' and then you'd have two different platforms that weren't talking to each other, each one with its mini-fiefdom."
- Senior Analyst, Deutsche Bank
6. Heavy Fines
7. European Central Bank's Low Interest Rates
All of these factors combined have led to the bank experiencing a major decrease in the Price per Share and now ultimately a restructuring consisting of 18,000 job cuts and an exit from the Global Equities and Trading. Moving from institutional clients, the bank plans on growing its asset management, currency trading, corporate-cash management, and trade finance businesses.
In the fog of the restructuring, CEO Christian Sewing has released a letter to the firm to discuss the restructuring and the future of Deutsche Bank (Find it here: https://www.db.com/newsroom_news/2019/deutsche-bank-s-transformation-a-message-from-ceo-christian-sewing-to-the-staff-en-11540.htm). Through the transformation, Sewing wants to bring the bank back to its roots by doing what strategy is all about: creating a competitive advantage or virtuous cycle of activities and doing things differently or better than competitors. The plan is for the bank to refocus on its core competency of of "[serving] German and European companies worldwide,... [providing] a global network and that paves the road to Europe for international companies and investors." This main method will be accomplished by 1) strengthening its Corporate Banking and 2) revising and refocusing its Investment Banking on activities that are more in line with serving commercial and corporate clients from a corporate treasury function, ultimately getting better at what the bank is more known for. In general, the bank will invest more in these areas through "innovative technology and outstanding advice."
The other piece of the puzzle that Sewing understands about strategy is that it means divesting from areas that a company cannot do better or differently. The bank is taking decisive action in areas that it is "not competing to win." For instance, to rebuild the bank, Deutsche will be reducing its Equities Sales and Trading division, which has hemorrhaged money, will resize the capital consumption in Fixed Income, and accelerate the sale of non-strategic assets.
From here on out, all we can do is wait and see if the bank's new strategy (Creating a competitive advantage or virtuous cycle of activities and doing things differently or better than competitors) under the leadership of Sewing will hold. If it goes well, the bank will become more profitable, be better at connecting the European market to the rest of the world, and will drive value for stakeholders. If not, the fall of Deutsche Bank can come upon us and who knows the effect it will have on the European Union and its economy or even the global economy, because of how interconnected the bank is.
Comments