Tensions are rising among the management board, the supervisory board and the workers’ councils at Deutsche Bank over speculation the bank will push even harder for cost savings by slashing expenses by between €6 billion ($8.06 billion) and €7 billion by 2018.
Initially, the bank set a goal of €4.5 billion in savings when it unveiled its Operational Excellence program in 2012, but sources say co-chief executive officers Anshu Jain and Jürgen Fitschen want more, which would likely mean a steep reduction in the number of employees. The bank is also struggling with soaring information technology costs.
Employee compensation accounts for more than 43 percent of Deutsche Bank’s expenses. Financial statements show IT costs have risen 19 percent to €804 million from the first quarter of 2012 to the first quarter of 2014.
A source within the employee ranks said rumors about additional cost-cutting measures have been swirling around the bank for several weeks, but workers have been given no solid information by management. Some observers believe Deutsche Bank will wait until after the summer break to make any announcements. A spokesperson for the bank refused to comment when contacted Friday.
Sources told Handelsblatt that Mr. Jain and Mr. Fitschen are committed to the new cost-cutting goals, but the workers’ council reportedly was taken by surprise and has demanded a prompt explanation of how and why management is raising the bar. A workers’ representative said Henry Ritchotte, chief operating officer and managing board member, will be asked to meet with workers and detail exactly what additional measures will be sought. Another insider expressed amazement that management has not yet revealed its plans, even though rumors are creating anxiety and unease among employees.
The German bank wants to catch up with their larger, global peers which are offering higher rates of return to investors.
Workers’ council chairman Alfred Herling, who also is the deputy chairman of the supervisory board, said: “Further plans are unknown to me. I have announced the urgent need for talks with the management board.” The new measures will be a hot topic when the supervisory board meets this week.
The management board knows it has an obligation to share new information and plans to offer more concrete data which will be available by next week including talks with bank workers. Increasing profitability at Deutsche Bank should be “a joint effort” and all employees must pull together, said a bank manager.
The bank announced its second-quarter results Tuesday, reporting a 16 percent rise in pre-tax profit to €917 million. Revenue fell to €7.86 billion from €8.2 billion in the same period last year.
For Mr. Jain and Mr. Fitschen, the increased cost-savings program is not an end to itself. The bank has added hundreds of employees to deal with new regulations and compliance issues. The U.S. Federal Reserve Bank in New York, for example, has been sharply critical of Deutsche Bank’s financial reporting on its American operations. The two executives want a more nimble bank capable of reacting more quickly to challenges and opportunities, particularly in investment banking and wealth management.
They would like to see the bank emerge as a frontrunner in global investment banking, which they believe could contribute far more to the bank’s profitability than it currently does.
The bank wants to catch up with global competitors who are getting a much higher return on their cost investments. U.S.-based JP Morgan Chase & Co., for example, spends 72 euro cent for every €1 it earns, while Deutsche Bank spends 89 euro cent to generate the same return.
Investment banking has been something of a problem child for Deutsche Bank. A sustainable recovery in bond trading under Mr. Jain has so far failed to materialize. Revenues from trading in fixed-income securities, foreign currencies and raw materials actually dropped by about 22 percent in the second quarter compared to last year and is running about 9 percent behind in a yearly comparison, but overall results have turned out better than some analysts had feared with second quarter revenues of about €1.64 billion.
In a telephone conference with analysts, the Deutsche Bank management board could point to an uptick in performance in July as a promising start to the third quarter. “Jain and Fitschen know that the support for investment banking will meet with acceptance, only if the area is successful without reservation,” a German banker told Handelsblatt.
With a growing number of regulations, higher legal costs and weaker earnings due to the unusually low interest rate levels, it’s clear that maintaining cost-cutting discipline will be an ongoing mission for Deutsche Bank.