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The Final Shoe Drops On Germany’s Deutsche Bank

Finance

Forgot profits for Deutsche Bank for 2019. The German lender is undergoing a radical restructuring that will see 18,000 jobs slashed worldwide and has already taken a 5 percent toll on shares.  London was bustling this morning, according to Twitter, with descriptions of staff frantically packing their stuff in order to get out the door before their security badges quit working. 

And that was just London. 

Trading staff in Asia were cut loose, too, and the purge also launched in the bank’s New York offices.  

All in all, 18,000 jobs are expected to be cut by 2022. That means 20 percent of the bank’s staff. But mostly the focus is on investment banking operations, which haven’t earned enough to justify the risks--or the costs. 

The restructuring will cost DB $8.3 billion. That comes on top of Q2 losses of $3.1 billion. 

At the same time, how about those risky investments that stand at over $83 billion? DB will outsource them to a “bank bank” to isolate $56 billion in high-risk assets and potentially sell the riskiest assets off. 

High-risk assets aside, DB will now focus on transaction banking and private wealth management. In doing so, it will have to close up some of its non-European business.  

We knew the restructuring was coming, and that DB was in trouble. Back in March, the bank’s investment unit reported a 2018 loss of around $750 million. For Q2, the bank generated $428 million in revenue, but that failed to impress anyone: After all, it was the worst quarterly result the bank had seen in five years or more. 

The past year has been devastating for DB, and shares have taken a huge hit. 

And it’s not just about risky investments. 

Related: How To Measure The Strength Of The Economy

Reputation has also taken a few blows, including the November raid on its offices over the Panama Papers investigations. Then there were corruption allegations that tied the ban to a $9-billion global money-laundering scheme run by Russia’s largest private investment bank. 

Things snowballed from there, with DB missing Q4 revenue estimates and seeing its share price almost cut in half by mid-way through the first quarter of this year. 

The failed merger talks with rival Commerzbank in April didn’t help, either. That failed even though the German government not only supported it but was gunning for it. 

So, will shares continue to slide, or will this radical restructuring be the bank’s saving grace?

Many analysts see to think the latter, eyeing improved profitability once the dust settles on the restructuring. 

Stephen Isaacs, chairman of the investment committee at Alvine Capital Management, told CNBC that these European banks simply can’t compete with Wall Street players or their global peers.

“Come on, guys, it is extraordinary that it has taken this long, and only in the case of a complete collapse in the share price, and starting to see some of their key clients moving away,” Isaacs said.

What many are eyeing, though, is the defacto boost to U.S. banks that might arise out of this. 

Analysts at Credit Suisse wrote in a note today that Deutsche Bank's market share will be reallocated to their well-positioned American counterparts.

The note estimates the U.S. banks could benefit to the tune of 5-10 percent in earnings-per-share growth in 2020. They also forecast that total return across the five banks (Bank of America, JPMorgan, Goldman Sachs, Citigroup, and Morgan Stanley) could exceed 20 percent in the aftermath of Deutsche Bank's reshuffling.

By Michael Kern for conil.me

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