Douglas Braunstein on Deutsche Bank’s strategy and potential

Douglas Braunstein on Deutsche Bank’s strategy and potential


I think some people in the media would characterise,
or have assumed that Hudson Executive has come in as an activist investor. Doug, I’m
sure, will speak to that. In his own words, he describes himself as an engaged investor.
Which for those of us in the management team, the Management Board, interacting with Doug,
we can all affirm that’s exactly what he is. He’s got great questions, great challenges,
is an engaged investor but, as you’ll hear from his presentation, is supporting what
management is doing and believes in the course we’ve set for this company.
I spent the better part of the last 18 months really looking hard at Deutsche Bank.
The precondition for buying was the new management team that’s been put in place.
I’ve met with about 75 large institutional investors, many who do not own your stock,
have over a period of time. And I’m going to share some of the perspectives I give to
them about why I believe Deutsche Bank today is the most compelling investment in the financial
services space, bar none. Because unlike most institutional investors
that own your stock I’ve sat in many of your shoes before. And it has included some
reasonably dark moments. And part of what I’m going to share with you is my very firm
conviction that there is not only light at the end of the tunnel but it is quite bright
and shiny. I think it is all for the moment, it is literally
all about execution. And perhaps more importantly, at least in my study of the company, is for
the first time in a very long time the Supervisory Board and the Management Board, in my belief,
are completely aligned around that strategy. And if I had to summarise the elevator speech
that I give to other investors, I think this is the most significant self-help story in
financial services. So I can’t… I can’t worry tomorrow about a hard or a soft Brexit;
it is out of our control. I can’t worry about what happens with the Italian budget;
it is out of our control. I can’t figure out who’s going to follow Draghi; it’s
out of our control. What this company has the ability to do is change the direction,
the trajectory, of its earnings profile relative to its capital base – based on the things
completely within your control. Everyone sitting in this room is the beneficiary
of the work that John Cryan did, quite frankly, to take the litigation reserves I talked about,
to write off bad assets and to raise the capital. So I actually look at the balance sheet as
not only incredibly well capitalised; highly, highly liquid, but relatively conservatively
marked. I’m going to spend a moment or two on costs,
which is just to say: first time a management team has actually said, ‘We’re going to
cut costs,’ and you’ve actually delivered on cost…and on your way to a 70% cost-income
ratio. Now, if I look at the bottom of this page,
you’ve got a) a long way to go to 70% and b) 70% is not Herculean by any stretch. And
so part of parcel of my messaging to you is, this bank and you all in this room have to
manage costs. It’s literally… It’s like waking up in the morning and breathing. You
have to manage costs, because without that your shareholders are not going to reward
you. That’s the cost picture. I believe it’s
eminently in your control, and I would tell you that there is, from an outsiders’ perspective,
there’s a new sheriff in town, to use that expression, and I think that is incredibly
positive long term for the company. You are, just to remind you all, you are the
largest retail bank in the third largest economy in the world. That’s what you are, which
is pretty good, last I checked. You have incredibly attractive credit characteristics; you have
an incredibly attractive customer base; you have unbelievably… You literally have free
liabilities. And the lifeblood of every financial institution – for any of you who had a front-row
seat to the financial crisis, the lifeblood for any financial institution is liabilities.
That’s it. You don’t have them, you don’t have competitive advantage; you don’t have
a right to exist long term. You guys have one of the best franchises on the planet for
generating liabilities. 50% of the business is in the CIB, as you
know. And let me tell you how I think about it. I think about it in thirds: a third, a
third, a third. A third is the Global Transaction Bank, right? You already heard me say I believe…
Honestly, I believe that’s the crown jewel of Deutsche Bank.
So, when I actually talk to institutional investors, I don’t believe you can be competitive
globally over the long run in fixed income without a transaction bank, and you guys have
a really, really, really good one. You also have another third of your business
which is world-class trading businesses and some world-class investment banking businesses.
I actually really like your PCB. It’s got sustainable competitive advantage. And, by
the way, I didn’t go through the 15 different reasons why I think the German retail market
is going to get better over time, okay. I really love your GTB-fixed income platforms.
You guys have to articulate why you have sustainable competitive advantage in the other businesses.
My comment to this group is, what you saw on the previous page is literally 100% within
your control. It doesn’t require intervention by the ECB; it doesn’t require the world
to be great. It literally just requires that you come in every day and you optimise the
franchise that you have in front of you. I have been incredibly impressed with everyone
I have met at the company. I cannot envision a scenario where you don’t deliver on that
2019. You have to be on a path to 4% return on tangible
common equity. So if you are capable of getting a 4% return, which I know you are, and a path
towards a return on tangible common equity of between 9 and 12%, depending on rates,
this is a stock that should trade at or above tangible book value. And that’s, at the
time, somewhere between 26 and 30 euros a share.
I do not know another place today in this markeplace to invest in a company with the
history, the asset base, the skill sets where I get a chance to double, triple or quadruple
my money over the next 3-5 years. The other piece I will just tell you is – and
I’ve said this to you guys privately – anecdotally, you’re doing much better than people believe
you are. Deutsche Bank is a 150 year-old company; it
is a national champion; it is the bank of the third largest economy in the world. You
have a global brand; you have global reach; you have some of the world’s best businesses.
This is a company that should be better. You can do better. 4% return on tangible common
equity is tomorrow’s goal. Let’s get to tomorrow and then we’ll talk about the next
day and the next day, because this is a company that should be earning its cost of capital
and then some over time.

Leave a Reply