Investors remain sceptical of the progress Deutsche Bank is making to hit the targets of its restructuring programme, following years of losses. If the numbers don’t improve – particularly in the investment bank – management may have little choice but to unleash another round of heavy cost cuts.

Deutsche Bank stock was skirting EUR11 per share towards the end of last Friday’s morning trading session. That was a drop of almost 5% from the previous day, 12% on the week and 31% year-to-date. Investors had initially reacted to comments by the CFO at a banking conference about a EUR450 million cost headwind and indications of a lacklustre first quarter.

Scope had already lowered Deutsche Bank ratings last November based on its view that the group’s business-model and financial recalibration remain less than reassuring, which it said could affect a return to healthier profitability and sustainable growth in business volumes. The issuer rating was cut to BBB+ from A-.

Deutsche Bank remains challenged because its business model is not very clear. Management initially tried to exit mass-retail by selling Postbank, for example, but couldn’t do that so are now trying to turn it around. The problem is German mass-retail banking is not very profitable, so this is work in progress.

“In wholesale and investment banking, the world is moving very fast and Deutsche Bank needs to run even faster to adapt; be that in terms of digital disruption, the level of rates, or the legal problems impacting its reputation. It has become tougher for the bank to generate business, and the atmosphere of uncertainty may not help client relationships,” said Sam Theodore, team leader for bank ratings at Scope.

“The challenge is whether Deutsche Bank can adjust its business model, create more robust revenues and – importantly -- start reducing its very high cost base. Among top-tier players, Deutsche Bank is in a particularly tough spot because US and European wholesale competitors have more diversified business franchises, primarily in the form of more robust domestic retail franchises. Executing on a radical adjustment remains an uphill struggle for Deutsche Bank.”

Deutsche Bank opted to retain a large balance sheet as part of a conscious effort not to deleverage in line with competitors. That was partly to show commitment to the markets they are in but strategically on the expectation that it would pick up capacity freed up by others. “The problem is that from this angle Deutsche may still be anchored in yesterday’s business model,” Theodore said.

For Scope’s most recent issuer report on Deutsche Bank click here.