Deutsche Bank AG Post - Achleitner/Cryan - The Bridge to Nowhere

After an under the gun, shoot from the hip and haphassard management board restructuring, there is a major risk that this is just a rear guard action and will crash and burn within six to twelve months. Changing the faces without a substantial change of policy and business strategy at Deutsche Bank AG is a cruel joke on the employees, clients and stockholders.

What should happen next assuming this is not a smoke and mirrors exercise to protect Dr. Paul Achleitner's butt and slightly extend the life of his already massively tarnished and diminished reputation?

Let's look at the struture of Deutsche Bank globally and its cost base and employment of capital.

Deutsche Bank London

With the onset of Brexit, digitalization, decentralization, there is no need for Deutsche Bank AG to maintain such a massive foot print in the UK. It is just an ungodly expensive place to do business. DB should immediately closed its Manchester office and transfer these jobs to Deutsche Bank North Carolina (IT, Infrastruture) and Frankfurt, Berlin and Poland to substantially reduce its back office fixed cost. Trading and Sales activities should move to Deutsche Bank Jacksonville, Florida. Employees can then enjoy the sunshine, have much cheaper housing and pay substantially lower US income taxes (no state and federal) and healthcare costs. Even the fish and chips is even better in Florida.

In London, Deutsche Bank AG should sell its Great Winchester Street building (old Morgan Grenfell HQ) as well as all other buildings and lease back only the space it really needs. UK real estate is at the top of the real estate cycle and only has downside potential post-Brexit. EU wholebanking can be easily conducted from Frankfurt. The books, employees and infrastructure can best move to Frankfurt and Berlin. This will create a massive cost savings and allow easier risk management and compliance oversight.

The gains on the sales of UK real estate should be employed to immdeiately write off any residual structured credit and other illiquid OTC derivatives. Further, potential losses on the NPL portfolio should be netted against other potential illiquid asset sales gains. In combination, this will allow Deutsche Bank to get out from under the current 50% Book Value valuation that the market assigns to DB's shaky and untrusted balance sheet. This in turn will allow DB to lower its funding cost and better prepare the bank for the coming recession and 50% stock market correction.

Deutsche Bank NYC/Deutsche Bank Jacksonville, Florida

The DB office in NY should be downsided and its front office parts moved to Deutsche Bank Jacksonville, Florida. Thus, including the UK job transfers, this hub becomes the Trading and Sales heart of the US operation and back office functions in NY should move to Deutsche Bank North Carolina. The offices in LA and Miami should be downsized and move to Jacksonville and North Carolina. The net effect should be a massive one-off and ongoing savings for Deutsche Bank USA. This should additionally produce savings in legal, audit, compliance and HR. There is no longer any justification for keeping operations in high cost and high tax states in the US. Let's let Trump provide dividends to DB shareholders and employees.

Deutsche Bank Japan

There are probably less savings to be had in Japan, but I assume that there are costs to be squeezed out of the infrastructure and buildings, which would allow the bank to more competitive price loans and other services or increase margins. In Japan, DB needs to re-think its strategy in institutional asset management and try to seriously participate in the retail fund and money market business. With the pieces of the old Morgan Grenfell Asset Management business and DWS, the existing DB relationship with Nippon Life needs to grow into a strategic relationship.

Deutsche Bank China/HK/SG

In Chinese speaking Asia, Deutsche Bank needs to study its operation and try to consolidate its various business entities, buildings and personnel deployment. DB's Asian books in London should move to HK/SG.

Deutsche Bank Russia

Closing DB Russia for compliance reason was a short-sighted and foolish decision. This operation must be reconcived, re-opened in the institutional banking, securties and asset management space. After so many years of troubled relations with Russia, it is about time for things to turnaround. DB was the leading western bank in Russian business, and it is time to rebuild with a strategic vision.

Deutsche Bank Inlandsfilialen

The DB domestic branch system needs to be returned to it pre-1994 structure and competencies. This would allow a stronger regional and local focus on clients, while the backoffice infrastrure should remain as it currently is. The two senior directors in each larger city (München, Nürnberg, Freiburg, Frankfurt, K?ln, Düesseldorf, Hamburg and Berlin) should be DB staff of substantial standing, weight and decision-making power, i.e. effectively regonial DB board members.

Deutsche Bank Culture/Ethos

Deutsche Bank must revive and reinstate the "old" DB culture that Dr. Ulrich Weiss, HR/Legal, destroyed with his bungled attempt to strip out key elements of the culture. For example, the titles of pre-1994 must return. DB role models must return, i.e. a Dr. Alfred Herrhaussen and Hermann-Josef Abs. DB must be THE domestic benchmark in each and every business that it operates. The bank should invest serious money in putting the old culture back in place - even at the risk that some things were indeed suboptimal.

I would execute the above if I had been handed the CEO role, but it was not to be. Thus, I can only hope and pray that things for Deutsche Bank work out, but I believe the new senior management team and supervisory board will be washed away by future market conditions.

What does this mean for the DB stock?

It should pop on Monday, April 9th. It is then time to sell and get short again. At EUR 8,00, it will be time to get long for the long haul.

Sunday, April 8, 2018

Rondal Eric Powell Consulting, Vero Beach, Florida, USA/Frankfurt, Germany