Deutsche Bank Shows the Long Road Ahead for Credit Suisse

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Persistent investor skepticism toward the German lender’s recovery underlines the challenge facing Credit Suisse to rebuild trust

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Meanwhile, as the German bank enters the final year of its turnaround, results released on Wednesday marked another improving quarter for revenue and profit. However, investors were spooked by higher than expected costs and the bank’s shares fell as much as 6% in morning European trading. Deutsche Bank points to the long and treacherous road ahead for Credit Suisse.

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Deutsche Bank’s turnaround is well under way. It does require a ramp up this year but has largely delivered on its original plan, with two notable adjustments. The group cost target was switched from an absolute number to an expense ratio, and initial plans to significantly scale back the investment bank were adjusted to a strategy of focused growth. These are important deviations because they raise questions as to how much the bank has really changed. While group results have mostly hit the mark, the cost-to-income ratio has been rising and profits continue to rely heavily on investment banking.

The first quarter did little to dispel these concerns. Revenue growth in corporate and private banks was welcome, but a big banking levy pushed up expenses, as did higher compensation, leaving investors worried about cost discipline. The shares remain cheap and two shareholders recently sold sizable stakes. Despite its steady performance, investors don’t yet believe in the change.

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Credit Suisse seems to be only getting started. Following its involvement in a series of scandals, it launched a three-year overhaul late last year that primarily focused on developing a new risk culture. It is a subtle plan that makes measuring progress difficult for outsiders, leaving room for interpretation.

First-quarter results were a case in point. Falling revenues might mean the bank reducing its risk appetite as planned, or could instead signal that customers are taking their business elsewhere. Net new asset inflows into its wealth management and private bank in the quarter provide some comfort, but still leave room for doubt. Likewise, the management changes announced could be a serious step to kick-start change or a more worrying sign that key executives have concerns over the bank’s future. With few concrete benchmarks for interim progress, steady performance is crucial. Even then it will likely take the Swiss bank a long time to repair itself.

Shares in both banks are much cheaper than European and US rivals alike, trading around 0.4 times tangible book value. Investors still need a lot of convincing that they might be worth more. Rebuilding trust in banking is a slow and fragile process.

Write to Rochelle Toplensky at [email protected]

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Credit: www.Businesshala.com /

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