Thread by @jeuasommenulle

By popular demand, a #DB thread (yeah, we all know I’m doing this just to get new followers, but who could resist the ego boost!) #DeutscheBank

So, that restructuring plan: OOOHHH MY GAWD they are putting 300bn of shitty derivatives in a bad bank, they arrrre sooo bust! The woooorld is going to end!

You got your lazy headline, so let’s look at it more seriously now.

First, they are indeed putting 288bn of leverage assets (probably mostly derivatives) in a bad bank, but there are few important things you should know.

1)They are not “bad assets” in the sense of being in default or gone sour, or anything. 2) they are not selling them. 3) this is just a *reporting* trick to separate the assets attached to the businesses they want to wind down.

The RWA number even includes operational risk RWA attached to them (so not even "assets")

Also, they are derivatives, so the notional used for leverage assets calculation are only very loosely linked to financial risk.

In fact, those assets illustrate perfectly DB’s problem: what they mostly are is long-dated derivatives that are difficult to unwind/net and that are not profitable anymore because changes in regulation make their ROE ridiculously low!

And this lead us to the real problem of DB – a point I, and others, have been consistently making: DB has no solvency problem, no liquidity problem… they simply are not profitable enough! 2% ROE is not enough for a GSIB

And this is what freaks out the ECB : a large GSIB with low profitability would be less resilient in cases of macro shock, if only because raising capital would be extremely difficult. So the SSM has been pushing for structural changes.

The Commerz merger was an option, but ultimately the social cost in Germany was too high in Germany, imo. Drastic cuts to the IB have been pushed by many for many years, by insiders and outsiders, but I believe three forces were against it:

1.The old dream to be the last man standing in the EZ. Didn’t work out like that.
2.Very strong internal resistance as DB is still very much managed by very well paid investment bankers.

3. Last but not least, rules on ADI meant that restructuring would mean coupon skip on AT1 bonds and this could have triggered a doom loop – this rule has changed, so the time has finally come!

Brexit is also a good excuse to launch the plan now, of course, as a big chunk of the layoffs will be in the UK instead of Germany!

So what about the plan itself?

Forget about the CET1 ratio, this is not an issue (in fact they don’t even need a capital raise & will just skip two divis.) The bigger story is whether they will finally manage to get that ROE closer to 10%

The big unexpected news is the total shut down of equities: this increases the amount to be transferred to the “capital release unit” (i.e. bad bank) to 74bn RWA (288bn leverage) and also the additional cost cutting: 4bn to 2022.

But 1st word of caution here: DB is an expert at cutting costs to add them back in a different P&L line. And they also announced 4bn “investments” in controls and 13bn “investments” in technology.

What part of this is genuinely investment and what part is just additional spending? No one can say from the outside but it will be an important item to watch.

The latter part is especially important as DB seems (according to recent IR calls) to have taken a very bullish view on the regulatory changes on IT deductions to CET1:

They claim they will be able to add a lot of software intangible to CET1 (we’re possibly talking tens of bn) where other banks are much more cautious and generally mention “negligible impacts”. Another assumption of the plan that will be worth monitoring.

Job cuts are at 18k, but most analysts had already 5k-10k factored in, so this a 10k-ish increment. Still significant ofc. The restructuring charge will be massive (7.4bn overall) but only 4.5bn through CET1.

But the BIG unknown is this: DB targets 25bn of revenues for 2022 (8% ROTBV), which is a 3% CAGR. How on earth can they achieve this by cutting businesses so much and without any help from Mrs Lagarde & Euribor ? I’m highly dubious.

Also, the IB is still expected to make only 6% ROTBV. Depressing.

A final important point on capital. The timeline of the plan is 2022 which is (surprise surpriiiise) also the timeline of the leverage ratio. Because forget all you read about DB’s CET1 ratio, this is totally irrelevant.

The binding metric is the leverage ratio. And this is where a new headache could come from for DB’s management. DB will have to meet the 3% minimum + the GSIB leverage buffer + the *new* Leverage Pillar 2R!

All this could lead the requirement close to 4.25% while they are are at… 3.9% !!!!

Of course they have a higher target now, 4.5% for 2020, 5% for 2022, but there is not much of a margin of error there....

End/ And sorry for the typos, too lazy to proofread.