Does Deutsche Bank Really Have A Path To 10% Return On Equity?

Deutsche Bank AG (USA) DB is now targeting a 9-percent reduction in costs for 2018 to €22 billion. While this cost reduction should partly offset return on tangible equity dilution from capital issuance, the target seems “fairly ambitious” and some revenue reduction may be expected, RBC Capital Markets’ Fiona Swaffield said in a report.

While maintaining a Sector Perform rating and a price target of €17 for the company, Swaffield mentioned that an ROTE of 6.7 percent is estimated for 2018.

Cost Reduction Could Be Revenue Drag

Deutsche Bank’s target for 2018 costs of €22 billion is €2 billion lower than RBC Capital Markets’ estimate including Postbank. Since lower costs include disposals, they could impact revenues. “On a net basis there should be some benefit to earnings so that our estimated 2018 ROTE remains broadly unchanged at 6.7 percent,” Swaffield wrote.

Related Link: Deutsche Bank's Capital Raise, Explained

ROTE Unclear

The path to a 10 percent ROTE over the next two to three years seems unclear, given the business mix. The analyst pointed out that although Deutsche Bank has set a target of ~10 percent ROTE, it has not specified a year by which it will achieve this.

“The updated strategy involves combining the divisions, to a large extent reversing the moves made in the previous strategy, and it is hard to see this making a significant difference to the growth trajectory other than via cost savings,” Swaffield commented.