Deutsche Bank, Germany’s largest bank, is planning sweeping cost-cutting measures as it seeks to boost competitiveness.
According to information attained by Handelsblatt, joint chief executives, Jürgen Fitschen and Anshu Jain, are planning to cut up to €2.5 billion ($3.4 billion) in costs by 2018. This will expand the bank’s current plans to trim expenses by around €4.5 billion by 2015, bringing total cuts to between €6 billion and €7 billion, according to sources close to the bank. Deutsche Bank refused to comment.
The renewed belt tightening efforts are seen as essential to boost the bank’s competitiveness. In the first quarter of 2014 its cost-income-ratio was 77 percent. In other words, for every €1 the bank made it spent 77 cent.
Deutsche Bank has been making progress in this area. In 2012, when Mr. Jain and Mr. Fitschen took over, the ratio stood at 92.5 percent and in 2013 it had been reduced to 89 percent. However, it still lags behind competitors. For instance, Goldman Sachs had a ratio of 63.2 percent last year and JP Morgan’s was 72.4 percent.
The Frankfurt-based bank has already said it wants to reach 65 percent by 2016.
The bank is not expected to look for job cuts at this time but rather it hopes to improve efficiency through technology and improved operations.
The company’s employees are to be informed next week about the details of the new cost-cutting plans.
Deutsche Bank has to make these cuts to improve profitability, as both its investment banking and private banking businesses are struggling due to current low interest rates, something that is affecting the entire banking industry.
At the same time tougher regulations and stronger capital requirements are pushing up costs for the industry.
“Anshu and Jürgen have to bring the share price up to at least €40 in order to brighten some faces. ”
Mr. Jain and Mr. Fitschen have already indicated which areas could benefit from cost-saving measures. For example, operations at its Cologne subsidiary Sal. Oppenheim Future could be made more efficient by integrating its back office system with Deutsche Bank’s.
“All-purpose banks often underestimate the savings that be achieved through digitalization,” said Dirk Vater, banking expert at the Bain & Company management consultancy firm in Frankfurt.
He believes that banks will cut the number their branches by at least 30 percent in the coming years, something that will help reduce administration costs significantly.
According to financial industry sources, Deutsche Bank wants to conduct more cross-border transactions for external customers and also carry out more digitalization in asset management. The company also plans to outsource some of the work currently undertaken at its Risk Center in Berlin to Romania and India.
In total hundreds of individual measures are planned that should gradually have an effect, a high-ranking employee of Deutsche Bank told Handelsblatt. In the end it should also “give the share price a kick-start,” the insider said.
The stock has not been performing well recently. It is currently €27 having lost around a quarter of its value over the past three months. That’s not good for shareholders or the bank’s top performers who often are paid partly in shares.
“Anshu and Jürgen have to bring the share price up to at least €40 in order to brighten some faces,” said one managing director.
That might take a while. Analysts are not expecting the bank to announce particularly impressive earnings when it announces its quarterly figures next Tuesday.
The bank already reported a decline of 34 percent in net income for the first quarter, partly related to costly legal settlements. It has set aside €2 billion for further legal disputes, although analysts say its eventual legal bill could reach €5 billion.
Its share price was hit again this week after it was announced that the U.S. Federal Reserve accused the bank of helping hedge funds avoid as much as $6 billion in taxes and of shoddy financial reporting.