Deutsche’s big opportunity

This week Deutsche Bank finally pulled the trigger on its rumored restructuring. Rather than a ill-founded merger with a German peer, hard decisions were made to refocus the bank around its core expertise in providing banking services to German corporates.

Having personally gone through a similar episode with Lehman Brothers nearly 11 years ago, I definitely sympathised with the painful images of bankers hauling cardboard boxes out of the office on Monday. But this is a different time in economic history, and a different exercise entirely.

Amidst the tough choices around divisions, assets, and people, there is however a very encouraging sign in Deutsche’s plan.

In an email sent to staff on Sunday night, CEO Christian Sewing revealed the bank has hired a Bernd Leukert (a senior exec from SAP) as a board member responsible for digitalisation, data and innovation. Senior management’s commitment to innovation is unequivocal, with 13 billion euros due to be invested in tech by 2022.

That’s significant. The restructuring is fundamentally defensive in motivation, reflecting a desire to focus on the bank’s traditional strengths and geographic sphere of influence. But this investment in technology shows the bank going on the offensive, revealing a commitment to pursuing a different kind of growth, one that is scalable, measurable and sustainable.

At the end of 2018, DB’s cost-income ratio was 93%. That’s way north of industry leader JPM, whose score is around 57%. So it’s absolutely right to look closely at different business units and jettison those that don’t generate a sufficient return on equity or capital. It’s notoriously hard to make money from equity trading these days, and with technology having chipped away at margins for 40 years, it’s not surprising that this division is the focus of cuts. With lower barriers to entry, equity trading capacity has spread around a number of players from banks to hedge funds to high-frequency outfits and a long tail of specialists.

However, DB’s transaction banking business is world class and has very high barriers to entry. It’s right to protect this jewel in the crown, and the bank shouldn’t be afraid to invest in this franchise from a technology perspective to further cement its position.

Mr. Leukert and his team have a real opportunity to make a positive difference if they can be bold and decisive. DB shouldn’t approach its tech initiatives with timidity and caution, but rather, should elevate them with the same courage that led them to this historic restructuring.

Importantly, being bold doesn’t mean going after moonshots and vanity projects. If this new tech team is sidled off to an obscure division with a pot of money to spend on proof-of-concepts, they will miss a huge opportunity, (not to mention waste a lot of money). The tech operation should be as close to business units as possible and should ideally sit within the banking business itself. It should be identifying real pain points and inefficiencies in the current business and be given the latitude and resources to find solutions to those pain points. The early signs are encouraging, with Chrsitain Sewing explicitly linking the bank’s investment in tech with making its operations “leaner and more efficient”.

Solutions may be built internally, or they might be sourced externally. But crucially, this is no time for ivory-tower thinking. It might not seem as glamorous, but by getting down and dirty in the nuts and bolts of the business, Mr. Leukert has an incredible opportunity to make a real impact on the bank.

Ultimately, despite the lurid headlines, I view this restructuring exercise as a positive step for the bank. Focusing on its strengths, and importantly investing in those strengths with best in class technology, could lead DB back to the vaunted position it once had.