GOLDMAN SACHS: Deutsche Bank's biggest problem is NOT management -- it's just not profitable

John CryanReutersJohn Cryan pictured in 2009.

Deutsche Bank revealed on Sunday that it is replacing
co-CEOs Anshu Jain and Jurgen Fitschen with John Cryan.

The markets clearly loved the news this morning as the stock price exploded in the early trading session, adding €2.5 billion ($US2.79 billion, £1.82 billion) to Deutsche Bank’s market capitalisation.

While this is a pretty brutal indictment of the performance of its CEOs, a number of analysts across the market warned that Deutsche Bank’s problems are far from over.

In fact, many say that the German lender needs to address a number of structural issues that are causing a greater problem to its existence than just management.

In May, Fitschen and Jain faced down a storm of shareholder criticism over its strategy and admitted their performance had fallen short. They also asked at the time if shareholders would continue to back them as they cut costs and reshape strategy. Many called Deutsche Bank’s restructuring plan “too little, too late.

Only a month before that, Deutsche Bank revealed that earnings fell by half in the first quarter this year. This was a greater-than-expected drop as quarterly net profit sank to €559 million (£408 million, $US608 million) versus a year ago.

Take a look at what analysts at Goldman Sachs say in a research note this morning (emphasis ours):

All in, we believe this announcement could initially be taken well by the

market — however we expect this to be short lived. Deutsche Bank’s central

challenges are structural, rather than management related — the basic difficulty is the absence of a high ROE platform. DBK does not have a

highly profitable private bank (as is the case with UBS/CS), and its retail/commercial bank is low ROE. At DBK, investment banking (and FICC) is the highest ROE business.

Goldman Sachs analysts also provide a whole section in its note on how “Does the new CEO imply a radical strategic change? We doubt it.” It also provides a chart about how Deutsche Bank is falling behind the average performance of an European bank.

Credit Suisse analysts are also doubtful over how long the positive rally on Deutsche Bank stocks will last.

In a research note this morning, Credit Suisse analysts said (emphasis ours):

Whilst the co-CEOs were under significant pressure following a disappointing strategy update, and challenged by a portion of shareholders at the last AGM, the timing of this

announcement is a surprise (only 6 weeks after the strategy update).

With the personality of the new CEO being highly regarded by the market, we think this
announcement could re-open the strategic debate. Awaiting clarity on this, we
remain Neutral (TP €30.5) but expect share price reaction to be initially positive.

Meanwhile, analysts at Morgan Stanley said the new CEO Cryan will focus on “execution as much as strategy.” Judging by its note, it has a little bit more faith that Cryan will be able to fulfil promises of cost cutting (emphasis ours):

“We think sharper execution will be critical to achieve value potential. New CEO John Cryan we

recall had a tight handle on costs whilst at UBS … Addressing the high exit costs of non-core will be a focus – and Cryan had a good track record on addressing non-core head on at UBS.”

So in other words, ousting Jain and Fitschen may have a short term effect on Deutsche Bank’s stock price and provide some form of hope that Deutsche Bank will improve its performance, but Cryan will need to tightly control costs and bring the bank back into profitability if the lender is going to please its shareholders in the long-run.

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