The bank had a culture problem, but when it began to embark on a period of restructuring, we were interested. Here's how our fundamental research helps unearth investment opportunities.
09.07.2024 | 06:55 Uhr
A great German thinker once said: “We rarely find people who achieve great things without first going astray1.”
Back in 2018 the analyst team at Columbia Threadneedle Investments considered Deutsche Bank2 to be an example of a culture problem. The old joke was that it was better to be an employee of the bank than a shareholder. From 1995, when it began building the investment bank, to 2018 total shareholder returns were negative €13 billion, while staff bonuses over the period were €79 billion3!
That year, under new leadership, the bank embarked on a period of restructuring. We were initially skeptical – Deutsche Bank’s previous track record of change was poor – but we took note when CEO Christian Sewing began hitting his targets. On Columbia Threadneedle’s Investment Grade Credit team we invest in credible turnaround stories. As a company improves, borrowing costs fall, bond prices rise and our clients reap the benefits. In this instance we talked to management, reviewed the numbers and decided it represented an investment opportunity.
Slowly, things started to change at Deutsche Bank. Over a six-year period the cost-to-income ratio (a measure of efficiency) fell by more than 15 percentage points and the return on equity (measure of profitability) improved from zero to around 6%4. What’s more, the culture around risk management and governance and the approach to society and the environment was overhauled.
Things are now looking brighter in Frankfurt, and credit markets have taken note. Deutsche Bank’s cost of borrowing is currently around the same level as Barclays or Société Générale – companies which have demonstrated greater stability and predictability of cashflows over the years.
So, what now for the new Deutsche Bank? We felt further progress would be harder to come by. Let’s look at why:
Deutsche’s investment bank performed well from 2000-06, but only because it was leveraged around 50x! In fact, when we look back and apply recent leverage levels of 18-20x, the investment bank didn’t meet its cost of capital at any point until Sewing arrived in the CEO role. By focussing on efficiencies and exiting underperforming businesses, Deutsche has since been punching its weight relative to peers such as Citi and Bank of America. While that is impressive, we thought further gains would require increased market share – which we thought unlikely. Deutsche Bank didn’t have a particular edge in this business relative to the big US players.
The new management team improved transparency and tightened
lending standards. The CFO and CRO led “investor deep dives” into the
darker corners of the balance sheet and the company avoided some of the
embarrassing mistakes that caught out its peers (for example, Archegos
and Signa). Credit risk had been well managed to-date and bad debt
numbers had come through on expectations.
Germany is a tough banking market. It consists
of the private banks (mainly Deutsche and Commerzbank), the public
sector banks (the Landesbanken and Sparkassen) and the credit
cooperatives (the Volksbanken and Raiffeisenbanken). The public and
cooperative sectors have a combined market share of about 50% and are
not-for-profit institutions. They don’t have shareholders or
profitability targets so can lend at lower margins. Put simply: the
competition can offer the same product at a better price. However, a couple of years into Deutsche’s turnaround, the
European Central Bank (ECB) started to hike rates and profitability
became easier to achieve. The German system is awash with deposits.
“Deposit beta” – the percentage of an ECB rate hike which gets passed
through to depositors – is around 30%. This rising rate effect helped to
add more than 20% to net interest income between 2021 and 20236.We
felt the timing was fortuitous. Interest rates have been the tide that
has lifted all ships in banking. As rates fall over the next couple of
years, our view was that profitability growth would be much harder to
come by.
Conclusion Deutsche is no longer astray. Sewing and his
team have steered things on to a better path. The credit market has
adjusted its perceptions. Valuations are close to those of peer
companies, which didn’t stray as far. However, we felt it would be a
tall order for the bank to continue this trajectory of improvement. As
such, it was time for us to say “auf Wiedersehen” and move on to the
next turnaround opportunity.
1Meister Eckhart, see Cyprian Smith: Meister Eckhart, The Way of Paradox, 1987
2Mention of specific stocks is not a recommendation to buy or sell
3Columbia Threadneedle Investments’ analysis of company statements, May 2024
4Columbia Threadneedle Investments’ analysis of company statements, May 2024
5Average loan-to-value on US Office commercial real estate at FY23 of 81%. Columbia Threadneedle Investments’ analysis of company reports, April 2024
6Columbia Threadneedle Investments’ analysis of bank reports, May 2024
For use by professional clients and/or equivalent
investor types in your jurisdiction (not to be used with or passed on to
retail clients). For marketing purposes. This document is intended for informational purposes only and should
not be considered representative of any particular investment. This
should not be considered an offer or solicitation to buy or sell any
securities or other financial instruments, or to provide investment
advice or services. Investing involves risk including the risk of loss
of principal. Your capital is at risk. Market risk may affect a single
issuer, sector of the economy, industry or the market as a whole. The
value of investments is not guaranteed, and therefore an investor may
not get back the amount invested. International investing involves
certain risks and volatility due to potential political, economic or
currency fluctuations and different financial and accounting standards.
The securities included herein are for illustrative purposes only,
subject to change and should not be construed as a recommendation to buy
or sell. Securities discussed may or may not prove profitable. The
views expressed are as of the date given, may change as market or other
conditions change and may differ from views expressed by other Columbia
Threadneedle Investments (Columbia Threadneedle) associates or
affiliates. Actual investments or investment decisions made by Columbia
Threadneedle and its affiliates, whether for its own account or on
behalf of clients, may not necessarily reflect the views expressed. This
information is not intended to provide investment advice and does not
take into consideration individual investor circumstances. Investment
decisions should always be made based on an investor’s specific
financial needs, objectives, goals, time horizon and risk tolerance.
Asset classes described may not be suitable for all investors. Past
performance does not guarantee future results, and no forecast should be
considered a guarantee either. Information and opinions provided by
third parties have been obtained from sources believed to be reliable,
but accuracy and completeness cannot be guaranteed. This document and
its contents have not been reviewed by any regulatory authority. In Australia: Issued by Threadneedle Investments
Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from
the requirement to hold an Australian financial services licence under
the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in
respect of the financial services it provides to wholesale clients in
Australia. This document should only be distributed in Australia to
“wholesale clients” as defined in Section 761G of the Corporations Act.
TIS is regulated in Singapore (Registration number: 201101559W) by the
Monetary Authority of Singapore under the Securities and Futures Act
(Chapter 289), which differ from Australian laws. In Singapore: Issued by Threadneedle Investments
Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1,
Singapore 239519, which is regulated in Singapore by the Monetary
Authority of Singapore under the Securities and Futures Act (Chapter
289). Registration number: 201101559W. This advertisement has not been
reviewed by the Monetary Authority of Singapore. In Hong Kong: Issued by Threadneedle Portfolio
Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square,
8 Connaught Place, Hong Kong, which is licensed by the Securities and
Futures Commission (“SFC”) to conduct Type 1 regulated activities
(CE:AQA779). Registered in Hong Kong under the Companies Ordinance
(Chapter 622), No. 1173058. In Japan: Issued by Columbia Threadneedle
Investments Japan Co., Ltd. Financial Instruments Business Operator, The
Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a
member of Japan Investment Advisers Association and Type II Financial
Instruments Firms Association. In the UK: Issued by Threadneedle Asset Management
Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No.
517895, both registered in England and Wales and authorised and
regulated in the UK by the Financial Conduct Authority. In the EEA: Issued by Threadneedle Management
Luxembourg S.A., registered with the Registre de Commerce et des
Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle
Netherlands B.V., regulated by the Dutch Authority for the Financial
Markets (AFM), registered No. 08068841. In Switzerland: Issued by Threadneedle Portfolio
Services AG, an unregulated Swiss firm or Columbia Threadneedle
Management (Swiss) GmbH, acting as representative office of Columbia
Threadneedle Management Limited, authorised and regulated by the Swiss
Financial Market Supervisory Authority (FINMA). In the Middle East: This document is distributed by
Columbia Threadneedle Investments (ME) Limited, which is regulated by
the Dubai Financial Services Authority (DFSA). For Distributors: This
document is intended to provide distributors with information about
Group products and services and is not for further distribution. For
Institutional Clients: The information in this document is not intended
as financial This document may be made available to you by an affiliated company
which is part of the Columbia Threadneedle Investments group of
companies: Columbia Threadneedle Management Limited in the UK; Columbia
Threadneedle Netherlands B.V., regulated by the Dutch Authority for the
Financial Markets (AFM), registered No. 08068841. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.Important information
advice and is only intended for persons with appropriate investment
knowledge and who meet the regulatory criteria to be classified as a
Professional Client or Market Counterparties and no other Person should
act upon it.
Diesen Beitrag teilen: