EFTA00797255.pdf

Unlocking Trapped Value Deutsche Bank EFTA00797255 Cheapest valuation among banks - Deutsche Bank • Deutsche Bank is the cheapest with a Price to Book ratio of 0.40 versus peer average of 1.07 P/B ratio of major banks DB Barclays SocGen BNP CS Citi HSBC UBS GS BankAm MS JPM 0 0.45 0.9 1.35 1.8 Price to Book (Source: Bloomberg Feb-18) EFTA00797256  Smallest market cap for a similar balance sheet size Market Cap in USD bn Bal Sheet in USD to DB • DB Barclays MI Barclays SocGen SocGen UBS UBS MS MS GS GS BNP BNP HSBC HSBC Citi Citi BofA BofA I=11M= JP Morgan JP Morgan 0 125 250 375 500 0 0.75 1.5 2.25 3 Source: Bloomberg Feb-18 Source: Bloomberg Dec-17 EFTA00797257  DB Stock Price is below 2009 levels Stock Price of DBK in EUR over time 120 90 60 30 0 Aug 05 Nov 06 Feb 08 May 09 Aug 10 Nov 11 Feb 13 May 14 Aug 15 Nov 16 Feb 18 4 EFTA00797258 Why now? • Legacy non-core assets - resolved by Dec 2016 • Legacy litigation - mostly resolved by Jan 2017 • Capital issues - mostly resolved by April 2017 Non-Core: Non-core division shut down on 31-Dec-16. Litigation: with Department of Justice was resolved on 17-Jan-17. DB agreed pay $7.2 bn to resolve matters related to mortgage backed securities, Capital: raise of EUR 8 bn successfully completed on 7-Apr-17. Pro-forma Tier 1 ratio is 15.1% and CRD 4 ratio is 4.1% 5 EFTA00797259 DB does not have unique circumstances • Weak FICC - affects banks like GS even more than DB as they are pure plays • Low Rates in Europe - affects banks like BNP, SocGen and UBS Trust factor - affects banks like CS, BNP and SocGen • Regulation - affects each and every bank • Litigation - affects US banks even more • People - working at DB have either worked at other banks like GS (CFO and Head of Rates), UBS (CEO), CS (Head of Fixed Income) etc EFTA00797260 So what is the problem? Game of Thrones • CEO vs 2 deputy co-CEOs • Retail bank head vs CEO of Postbank • Head of Asset Management wants to IPO his division • Co-heads everywhere • Friends and family rule Shareholder comes last in this fight 7 EFTA00797261  Little or no stock owned by Mgmt Ownership of insiders as a % of outstanding stock BNP MY OWN Deutsche bank HSBC SocGen BUSINESS Barclays Bank America Citi MS JPM CS GS 0 0.75 1.5 2.25 8 (Source: Bloomberg Oct-17) EFTA00797262 The plan to double the stock price • We have no ambition to ace the class. We just want to be bottom quartile instead of bottom of the class. The stock price is 12.9 with 2 bn shares P/B ratio of major banks DB 4.0 Barclays SocGen BNP 90 CS Citi HSBC UBS GS BankAm MS JPM 0 0.45 0.9 1.35 1.8 Price to Book (Source: Bloomberg Feb-18) EFTA00797263 DB has produced many plans Never executed and finished Strategy 2020, Strategy 2015 EFTA00797264 Plan - details and more details • Current share price is EUR 12.9 Needs one empowered CEO Phase 1 - Quick Results (6 month timeline) • Spin-Off/IPO not core businesses - Receive EUR 6.5 per share • Phase 2 - In parallel optimization of business (12 months) • Increase valuation on rest of company to EUR 23.5 per share 11 EFTA00797265 PHASE 1 • DB is actively preparing for an IPO of DB Asset Management (AM) and integrating a standalone PostBank into DB Retail Bank • AM - is expected to IPO at a valuation of EUR 7-8bn with DB maintaining a super-majority control STOP THIS AND RETURN CASH AS A TAX-FREE SPINOFF - WORTH EUR 4 PER SHARE • Postbank - is expected to be integrated into DB retail bank STOP THIS AND SPIN OFF (TRADE SALE) - WORTH EUR 2-3 PER SHARE 12 EFTA00797266 PHASE 2 - Wont be a GUB anymore • DB wants to be a global universal bank (GUB). The focus has to be on delivering shareholder value • Investment Bank - We have very detailed plans to reduce foot print and increase value • Retail Bank - We need to stop the pretense and hire professionals. We have a detailed plan for this as well 13 EFTA00797267 Why do activists shy away from banks Regulator, Regulator & Regulator - You need to know what each regulator is willing to accept Unknowns - Big annual reports but low transparency on assets and derivatives • Litigation with governments - cannot be measured • US banks solved problems quickly • EU banks have been perceived to be quasi state entities 14 EFTA00797268 Why us? • Together, we have over 50 years experience in DB and over 60 years in European Banks • Good relationship and understanding of all regulators - FED, FCA and ECB/BaFin • Strong track-record in building businesses and most recently resolving all legacy matter of DB • We know the management board members well. Their personal battles are consuming the company 15 EFTA00797269  How to execute spin-off of Asset Management? "And all you do is follow the yellow brick road" - The Wizard of Oz 16 EFTA00797270 Current Status - Asset Management • DB is planning to a primary listing/ IPO of a minority stake of asset management • Operational status of the IPO • Asset Management legal entities and support functions have already been separated from the parent • Bankers have been hired to sell the stock in an IPO • Current anticipated IPO timeline is early 2018 17 EFTA00797271 Why an IPO and not a spin-off? • Deutsche Bank likes asset management business and wants to retain a super-majority control • Management wants to give currency to asset management to "pay employees" and have "currency" to merge/ acquire other AM businesses • ALL WELL AND GOOD IN NORMAL CIRCUMSTANCES 18 EFTA00797272  Goodwill impairment of EUR 1.021Bn Deutsche Asset Management (in EUR mn) 2017 2016 2015 Revenue 2,532 3,015 3,016 Adj Costs 1,806 3,220 2,334 Income before 725 (206) 682 Income Taxes Invested 702 Bn 706 Bn 744 Assets Net New 16 Bn (41) Bn 18 Money Cost Income 71% 107% 77% Ratio Abbey Life part of Asset Management 19 EFTA00797273  Deutsche Asset Management Clean (Our model) (in EUR mn) 2017 2016 Adjusted 2015 Adjusted Revenue 2,532 2,619 2,758 Adj Costs 1,806 1,825 2,078 Income before 725 794 680 Income Taxes Invested 702 Bn 706 Bn 744 Bn Assets Net New 16 Bn (41) Bn 18 Money Cost Income 71% 69% 75% Ratio 20 Our estimates based on public filings EFTA00797274 Where do asset managers trade? • DB Asset Management will trade around EUR 7-8Bn at listing based on relative value (EUR 4 per share). If spun off, there is substantial upside Valuation of Major Asset Managers Net Cash Market Absolute P/ Market Asset Manager AUM Alternatives AUM Cap E Cap Affiliated Mgr 804 10.7 11.0 Apollo 246 11.4 13 Blackrock 5,977 17.5 80.3 Blackstone 407 10.5 38 Franklin 753 10.5 23.9 Carlyle 196 8.9 8 Eaton Vance 406 16.8 6.5 KKR 159 8.1 17 Federated 364 13.4 3.3 Oaktree 101 12.6 7 Invesco 918 12.6 14.7 Janus As of 30- 361 13.7 7.3 Henderson Nov-17 Numbers in Legg Mason 754 12.8 3.7 $bn T Rowe Price 948 18.0 24.5 Wisdom Tree 0 33.3 1.6 Source: Bloomberg 30-Nov 2017 21 EFTA00797275 Three businesses of Asset Management Active Long Only - Biggest and most profitable business of Asset Management. It is a classic active equity/ fixed income management. Our estimate is around EUR 550 Bn XTrackers - Passive ETF business where DB has a market leadership in Europe but sub-scale in US. Our estimate is EUR 80-90 Bn • Alternative business - RREEF good in real estate and infrastructure. Lumpy performance fees. AUM is 80 Bn Breakdown of AUM and profitability is not provided 22 EFTA00797276  Spin-Off of Postbank "Would you tell me, please, which way I ought to go from here?" - Alice in Wonderland 23 EFTA00797277  • What is Postbank? • What is Postbank? ft Postbank Independent retail bank with 9Mn customers in Germany. „ KEIN PROBLEM. Acquired by Deutsche Bank EXIIESSEASY xnwat over 2008-2014 (multiple stages ermingena. Zu,1ellung and squeeze out) en 'whiten tag vor Oder to 12 - 9, vor 10 deutschlandwee Has EUR 118Bn deposits and a balance sheet size of EUR 147bn Information 14/ Independent bank, different systems BaFin did not give the waiver to use the deposits of Postbank in broader Deutsche Bank 24 EFTA00797278 Postbank strategy - directionless • 2017 - DB announces its intention to integrate Postbank • 2015 - DB announces that it would sell Postbank • 2015 - all the minority shareholders of Postbank were "squeezed out" • 2012 - DB announces intention to fully integrated Postbank. Appoints board members. Integration fails over the following years • 2012 - DB increases stake to 93.7% • 2010 - DB increases stake to over 50% • 2008 - DB buys 30% of Postbank for EUR 2.8bn from Deutsche Post 25 EFTA00797279 Postbank financials Net Revenues 2,322 3,320 3,143 Adj Costs N/A 2,853 2,593 Income before N/A 307 584 Income Taxes Equity N/A 7,226 7,164 RoTE N/A 6.2 13.1 Cost Income N/A 85.8 80.3 Ratio DB Earnings Reports 26 EFTA00797280 Valuation of Postbank • Tangible Book value of Postbank is 5.3bn • Our estimate of the value will be EUR 4-6Bn or 2-3 per share • We refer to Austria and Europe as Germany is influenced by DB and Commerzbank Bank Valuation Metrics of Germany & Austria Aggregate European Bank Valuation Metrics Germany Austria All Banks Adj P/E 18.5 9.5 P/E (adj) 10.4 Price/Book 0.43 0.83 P/Tangible Equity 1.03 Cost/Income 73% 63% ROTE 8.4% Price/ Tangible 0.44 0.92 Book 27 EFTA00797281  Management Overhaul "No man can serve two masters" - Bible 28 EFTA00797282 CEO - Pick your poison I Name John Cryan Title CEO Our Take Ex-CFO of UBS, very intelligent but not decisive Ex-CFO of EON, ex-GS Partner, FIG Marcus Schenck Deputy Co-CEO Banker. Quick to act but lacks clear strategy Spent his career in risk management and Christian Sewing Deputy Co-CEO audit. Never managed or turned around a businesss 29 EFTA00797283  What about the elephant in the room? Corporate and Investment Bank It is additional upside but not the only source of value creation 30 EFTA00797284 What about the elephant in the room? Corporate & Investment Bank • Revenue picture shows that most of the revenues are still from classic Sales & Trading. This business is broken Transaction Banking and Financing are only ones earning cost of capital Revenues in EUR Mn 2017 2016 2015 Global Transaction Banking 3,942 4,421 4,609 Equity Origination 396 405 658 Debt Origination 1,327 1,393 1,481 Advisory 508 495 575 Origination and Advisory 2,231 2,292 2,714 Financing 2,231 2,375 2,127 Sales & Trading (Equity) 2,085 2,571 3,416 Sales & Trading (FIC) 4,380 5,087 6,083 Sales & Trading 6,465 7,658 9,499 Other (644) 17 (51) Total net revenues 14,226 16,763 18,899 31 EFTA00797285 Costs and everything else? Costs in EUR Mn Total net revenues 14,226 16,763 18,899 Costs Provision for credit losses 213 816 393 Compensation and benefits 4,263 3,955 4,897 General and adm expenses 8,759 9,655 11,662 Impairment of goodwill 6 285 2,168 Restructuring activities 82 299 129 Total noninterest expenses 13,110 14,193 18,856 Income (loss) before income 877 1,705 (376) Resources Employees -Front Office 17,251 17,140 17,169 Total employees (full-time 41,349 39,634 39,776 Assets (at period end) 1,127,000 1,201,894 1,236,770 Risk-weighted assets (at per 232,000 237,596 247,423 CRR/CRD 4 leverage expost 1,029,946 954,203 1,007,791 Average allocated sharehold 44,182 40,361 40,753 Cost/income ratio 84.0 % 84.7% 99.8 % Post-tax return on average s 3.3 % 2.8 % (0.6) °A Post-tax return on average tE 3.5 % 3.0 % (0.6) `)/0 32 EFTA00797286 What are the businesses of CIB? Business Sub Classification What to do? Equities Cash Equities Prime Finance Maintain Derivatives =km Add a lot Corporate Finance Reduce a lot Credit Portfolio Reduce a lot FICC Rates Reduce a lot Foreign Exchange Maintain Emerging Markets Add a lot Global Credit Trading Add a lot Asia Pacific Add a lot Global Capital Markets Equity Capital Markets Maintain Debt Capital Markets Reduce Financing and Solutions Group Maintain Leveraged Debt Capital Markets Add a lot Global Transaction Banking Mir Add a lot 33 EFTA00797287 RWA Breakdown PBC ex Asset in EUR Bn CIB Postbank Postbank Manaiement Credit Risk 124 36 37 4 RWA CVA RWA 9 0 0 Market Risk 30 5 RWA Operational 74 7 1 5 Risk RWA 237 44 44 9 Total RWA 356 As of End-2016 per DB Annual Report 34 EFTA00797288 Transaction Banking a hidden jewel • Pure-play transaction banking type businesses trade at high multiples • By this metric, GTB will be worth EUR 16 bn as a Market independent listed company P/E Cap • This is EUR 8/ share State 36.5 16.24 Street • Transaction Banking has a Northern revenue of EUR 4bn, we 22.2 20.45 Trust estimate the profit margin is 20-25% Bank of 55.5 15.80 New York 35 EFTA00797289 Costs • DB overpays to infrastructure employees compared to front office employees. Instituting rules will reduce costs - • No supplemental base salaries for non-front office • No international travel for non-client facing employees (phone or VC) • Individual incentives tied to reducing costs • Eliminate co-heads across the bank 36 EFTA00797290 What about the retail bank and wealth management? Lots of opportunity 37 EFTA00797291 PBC financials includes Postbank 2017 20161 2015 Private & Commercial Clients 5,013 5,226 5,603 Postbank 3,124 3,366 3,112 Wealth Management 2,041 1,880 2,097 Hua Xia 0 618 (175) Total net revenues 10,178 11,090 10,637 Net interest income 5,876 6,201 6,415 Commission and fee income 3,367 3,395 3,816 Remaining income 935 1,494 406 Provision for credit losses 313 439 511 Compensation and benefits 3,966 4,042 4,161 General and administrative expenses 5,157 5,029 5,139 Impairment of goodwill and other intangible assets 0 0 3,608 Restructuring activities 360 141 586 Total noninterest expenses 9,495 9,212 13,495 Income (loss) before income taxes 382 1,439 (3,370) 38 EFTA00797292 PBC Resource Efficiency Resources Employees 43,671 45,045 46,601 Total employees 51,303 53,533 54,509 Assets (at period end) 330,884 329,869 312,732 Risk-weighted assets (at period end) 88,656 86,082 92,857 CRR/CRD 4 leverag 342,146 342,424 329,902 Average allocated shareholders' equity 14,793 14,072 14,182 Invested Assets 505 501 583 Net asset inflows 5 (42) 3 Client Assets 711 694 771 Efficiency Ratios Cost/income ratio 84.4 % 83.1 % 126.9 % Post-tax return on average shareholders' equity 6.3 % 6.7 % (15.4) % Post-tax return on average tangible shareholders' equit 7.3 ok 7.7 % (18.1) % 39 EFTA00797293 PBC versus the rest Balance Sheet Op Profit (2017) What is asset side? Aareal 44bn 310-350Mn Structured CRE Bonds, consumer loans, property BAWAG 40bn 500Mn lending, DACH Corporates, bought loan These are our estimates as Postbank and DB Retail 140bn 700Mn international division are not well Bank disclosed 40 EFTA00797294 Plan for the Remaining Retail Bank - Asset Side • Great retail banks have very effective assets or high NIM • The differentiated asset base comes from specialty lending • BAWAG - Significant bond portfolio (6bn out of 36bn portfolio) • Aareal Bank - Pure play focus on CRE • NIM can easily be increased by EUR 200Mn • Partner with KKR, LoneStar or Blackstone to be their preferred CRE and NPL financier • Lend to small real estate developers in Germany • Bring Lending Club/ SoFi to DACH and be the balance sheet provider • Commissions can be increased by EUR 100Mn • Better focus on selling equities and build a Schwab type platform • Acquire or hire new fintech platforms 41 EFTA00797295 Wealth Management • It is a mid-sized global wealth management • It is currently run by a former head of strategy than a wealth- management expert • We need a strong leadership to build and grow in EUR Mn 2017 2016 2015 Revenue 2,041 1,880 2,097 Invested 506 Bn 501 Bn 583 Bn Assets Asset 4 Bn (42) Bn 3 Bn Inflows Client 711 Bn 694 Bn 771 Bn Assets 42 EFTA00797296 "It is not necessary to do extraordinary things to get extraordinary results" -Warren Buffett 43 EFTA00797297 Division Value per Share PostBank 2 AM 4 GTB 8 IB 16 PBC 3 Sum 33 44 EFTA00797298