Deutsche Bank AG earns less than most global rivals when accounting for the risks it’s taking, putting pressure on management to slash jobs and businesses.
Germany’s largest bank needs to cut costs by as much as 2 billion euros ($2.2 billion), or about 7 percent, and shrink its debt-trading operations to bolster returns, according to analysts at Macquarie Group Ltd. and Nomura Holdings Inc.
Co-Chief Executive Officers Anshu Jain and Juergen Fitschen have sought to keep a full-fledged investment bank and consumer-lending unit since taking over in 2012, even as rising capital requirements hurt profitability. Almost three years on, that strategy looks increasingly outdated as returns lag targets and competitors such as Barclays Plc make deeper cuts.
“They need to do something radical because their strategy doesn’t seem to have convinced regulators or investors,” said Dirk Becker, an analyst at Kepler Cheuvreux in Frankfurt who recommends investors buy Deutsche Bank’s shares.
The bank is considering options including a sale of the Postbank consumer-lending unit and a reduction of client offerings at the retail- and investment-banking divisions, which may lead to job cuts, a person with knowledge of the discussions said. The results of a strategic review may come as early as this month, said two people familiar with the plan who asked not to be identified because the matter is private.
“It is irresponsible to speculate on the sale of any business,” Deutsche Bank spokesman Michael Golden said.
Deutsche Bank made less profit before tax as a proportion of its risk-weighted assets than five of eight global competitors, and less than half what JPMorgan Chase & Co. earned last year, data compiled by Bloomberg show.
It hasn’t cut as deep as some rivals. In 2012, Jain and Fitschen announced almost 2,000 job reductions. UBS Group AG, the biggest Swiss bank, said later that year it would eliminate about 10,000 positions, while Barclays said last May that it would cut 19,000 jobs by 2016. Anthony Jenkins, CEO of London-based Barclays, pledged Tuesday to do “whatever it takes” to increase returns at the investment bank.
Royal Bank of Scotland Group Plc, based in Edinburgh, may slash as many as 14,000 investment-banking jobs, or more than two-thirds of the total, a person with knowledge of the matter said on Wednesday. Standard Chartered Plc announced in January plans to eliminate 4,000 positions.
Deutsche Bank’s stock, one of the worst performers among major lenders in 2014, perked up this year as some investors anticipated a change of course and the European Central Bank moved to stimulate the economy. It’s gained 16 percent, more than the 9.5 percent increase in the Stoxx Europe 600 Banks Index.
“Deutsche Bank needs to dial back its global aspirations,” said Lutz Roehmeyer, who manages $1.1 billion at Landesbank Berlin Investment. “They can’t be doing everything everywhere.”
The best way to boost returns would be to cut its interest-rates trading business by half, rather than sell Postbank, Autonomous Research LLP said in a note last month. Along with other reductions, that could increase return on equity, a measure of profitability, to 12 percent in 2017, the analysts said. The bank’s average over the past three years was 1.5 percent.
Cuts to the business, where the bank ranked among the top five firms in 2013, would mark a reversal for Jain, who has said Deutsche Bank stands to benefit by investing in fixed-income trading as competitors retrench.
Trimming the investment bank alone won’t be enough, said Becker. The asset and wealth management unit had the highest compensation costs as a share of revenue last year, above the investment bank, which is home to the best-paid employees, and the consumer unit, which has the most staff, filings show.
“They face the difficult political problem of balancing shedding jobs in Germany against reducing headcount in international investment banking,” said Christopher Wheeler, an analyst at Atlantic Equities in London.
Cutting 2 billion euros of costs over two years, on top of previously announced reductions through 2015, would lift return on equity to about 10 percent next year, according to Piers Brown, an analyst at Macquarie. That’s still short of the bank’s 12 percent target.
Deutsche Bank needs to extend its cost reduction plan by at least 1 billion euros to align expenses with its cost targets, said Jon Peace, an analyst with Nomura.
“It’s hard to imagine a cost program that wouldn’t have some impact on headcount,” said Brown.
Germany’s largest bank needs to cut costs by as much as 2 billion euros ($2.2 billion), or about 7 percent, and shrink its debt-trading operations to bolster returns, according to analysts at Macquarie Group Ltd. and Nomura Holdings Inc.
Co-Chief Executive Officers Anshu Jain and Juergen Fitschen have sought to keep a full-fledged investment bank and consumer-lending unit since taking over in 2012, even as rising capital requirements hurt profitability. Almost three years on, that strategy looks increasingly outdated as returns lag targets and competitors such as Barclays Plc make deeper cuts.
“They need to do something radical because their strategy doesn’t seem to have convinced regulators or investors,” said Dirk Becker, an analyst at Kepler Cheuvreux in Frankfurt who recommends investors buy Deutsche Bank’s shares.
The bank is considering options including a sale of the Postbank consumer-lending unit and a reduction of client offerings at the retail- and investment-banking divisions, which may lead to job cuts, a person with knowledge of the discussions said. The results of a strategic review may come as early as this month, said two people familiar with the plan who asked not to be identified because the matter is private.
“It is irresponsible to speculate on the sale of any business,” Deutsche Bank spokesman Michael Golden said.
Deutsche Bank made less profit before tax as a proportion of its risk-weighted assets than five of eight global competitors, and less than half what JPMorgan Chase & Co. earned last year, data compiled by Bloomberg show.
It hasn’t cut as deep as some rivals. In 2012, Jain and Fitschen announced almost 2,000 job reductions. UBS Group AG, the biggest Swiss bank, said later that year it would eliminate about 10,000 positions, while Barclays said last May that it would cut 19,000 jobs by 2016. Anthony Jenkins, CEO of London-based Barclays, pledged Tuesday to do “whatever it takes” to increase returns at the investment bank.
Royal Bank of Scotland Group Plc, based in Edinburgh, may slash as many as 14,000 investment-banking jobs, or more than two-thirds of the total, a person with knowledge of the matter said on Wednesday. Standard Chartered Plc announced in January plans to eliminate 4,000 positions.
Deutsche Bank’s stock, one of the worst performers among major lenders in 2014, perked up this year as some investors anticipated a change of course and the European Central Bank moved to stimulate the economy. It’s gained 16 percent, more than the 9.5 percent increase in the Stoxx Europe 600 Banks Index.
“Deutsche Bank needs to dial back its global aspirations,” said Lutz Roehmeyer, who manages $1.1 billion at Landesbank Berlin Investment. “They can’t be doing everything everywhere.”
The best way to boost returns would be to cut its interest-rates trading business by half, rather than sell Postbank, Autonomous Research LLP said in a note last month. Along with other reductions, that could increase return on equity, a measure of profitability, to 12 percent in 2017, the analysts said. The bank’s average over the past three years was 1.5 percent.
Cuts to the business, where the bank ranked among the top five firms in 2013, would mark a reversal for Jain, who has said Deutsche Bank stands to benefit by investing in fixed-income trading as competitors retrench.
Trimming the investment bank alone won’t be enough, said Becker. The asset and wealth management unit had the highest compensation costs as a share of revenue last year, above the investment bank, which is home to the best-paid employees, and the consumer unit, which has the most staff, filings show.
“They face the difficult political problem of balancing shedding jobs in Germany against reducing headcount in international investment banking,” said Christopher Wheeler, an analyst at Atlantic Equities in London.
Cutting 2 billion euros of costs over two years, on top of previously announced reductions through 2015, would lift return on equity to about 10 percent next year, according to Piers Brown, an analyst at Macquarie. That’s still short of the bank’s 12 percent target.
Deutsche Bank needs to extend its cost reduction plan by at least 1 billion euros to align expenses with its cost targets, said Jon Peace, an analyst with Nomura.
“It’s hard to imagine a cost program that wouldn’t have some impact on headcount,” said Brown.
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