Deutsche Bank AG (DB) (“DB”), on the other hand, has far more complicated obstacles to overcome and has been the posterchild for Europe’s banking maladies. That said, 2019 was a far less bad year for DB than several previous years. In fact, the revolving door of CEOs seems to have stopped revolving as a result of the alacrity with which current management has moved on a variety of critical initiatives. Most notably, cost reduction targets are on track to date and revenue attrition resulting from the restructuring efforts appears less significant than many had feared. Operating performance of various divisions, its traditional German banking business for example, appear satisfactory and its corporate banking business has performed fairly well. Management has also successfully exited its European prime brokerage business, among its most capital intensive units, providing an important step in its effort to reduce headline leverage ratios. Getting surprisingly little attention however is that, during the year, DB management formed a “Capital Release Unit” to house assets of discontinued businesses it intends to liquidate over time. Management committed to reduce leverage exposure within the CRU by 95% by 2021 and estimated that its liquidation would facilitate a return of capital to shareholders of roughly EUR 5 billion, beginning in 2022. For perspective, the entire market cap of DB is approximately EUR 15.8 billion today. As of the end of September, the CRU had approximately EUR 9.8 billion of equity embedded within, so the liquidation is intended to both enable the return of capital and bolster DB’s retained capital position. According to a December disclosure, the CRU liquidation plan is running ahead of schedule. Finally, it is also certainly worth noting that DB still owns a 79.5% stake in publicly-traded DWS Group AG, whose shares provided a total return of 42% in 2019 bringing its market cap to EUR 6.5 billion, making DB’s stake worth EUR 5.2 billion today, or roughly one third of DB’s market value. While DB indisputably has much more work left to do, we admire the progress made during 2019 and can see many paths for substantial value to emerge.
From Third Avenue Value Fund (Trades, Portfolio)'s fourth-quarter 2019 shareholder letter.
