OpinionReturn and cost objectives

Deutsche Bank has a credibility problem

Deutsche Bank CEO Christian Sewing sticks to his return and cost promises. But shareholders and analysts have doubts about it.

Deutsche Bank has a credibility problem

At this year's annual media conference in Frankfurt, Christian Sewing presented himself in a combative mood. He expressed unwavering confidence that his bank would achieve its set goals for 2025. When it came to the return target of more than 10%, he emphasized the "more than" with a smile. Sewing also believes that the targeted cost-to-income ratio of less than 62.5% is achievable, partly because the bank is more flexible in its costs than many might think.

However, the "stable and resilient" cost path outlined by Sewing is not yet visible to outsiders. In 2023, primarily costs increased – not only due to inflation. Non-interest expenses rose by 6% to 21.7 billion euros, including non-operating costs of around 1.1 billion euros. The cost-to-income ratio stands at 75%, far from its target.

Analysts are skeptical of the equity story

Analysts, in consensus, do not believe in a 10% return on equity. This is understandable, especially considering that it dropped from 9.4% to 7.4% compared to the previous year. The 9.4% figure was achieved only thanks to a tax credit that was not repeated in 2023. In terms of revenues, the bank has indeed grown more strongly than planned, but, like all banks, it was substantially fueled by interest-driven momentum.

The question arises: How does Deutsche Bank plan to achieve 10% by 2025 when it couldn't do so even in the absolute peak of interest rates? Hopes are certainly placed on the expensive-to-maintain investment bank. Through the acquired Numis, Deutsche Bank hopes to gain access to significant advisory business revenue in the UK. Overall, revenues are expected to reach around 32 billion euros by 2025, representing an average annual growth of 5.5 to 6.5%.

Deutsche Bank needs to cut costs

Ultimately, it will primarily come down to costs. The significant increase this year is partially justified by the bank management as conscious investments and expenses that are intended to have a revenue-increasing or cost-reducing impact in the medium to long term. Nevertheless, the bank must somehow save 2.5 billion euros and reduce costs to around 20 billion euros by 2025 for Sewing's return calculation to work. Whether this convinces shareholders in the long term remains to be seen. For now, they seem appeased.