Last year was a woeful one for Deutsche Bank. Germany’s embattled lender posted a record loss of almost €6.8 billion ($7.4 billion), leaving no money for dividends to stockholders.
But even in that horrible year, the bank still found money to award employees from a total bonus pool of €2.4 billion. Those in the investment banking division, which is blamed for many of Deutsche’s legal troubles, took home €1.45 billion in rewards.
No wonder then that angry large shareholders are insisting this year should be different: Germany’s largest bank should save not only on dividends but also take the ax more vigorously to bonuses. Indications from financial sources are that the bank’s top management is listening.
It’s true that this year’s numbers will be somewhat different. To the surprise of most analysts, Deutsche Bank managed to post a profit of €278 million in the third quarter of this year. Its net income for the first 9 months of 2016 is now €534 million, according to new figures released Thursday morning.
The results provide Deutsche Bank with some much needed breathing space. But the headline figures mask a number of underlying problems the bank is still battling with – above all on the legal front.
Deutsche Bank's bonus pool could determine whether or not it earns a profit this year.
The fact is that the bank’s share price has fallen 40 percent since the beginning of January. In the past month it has had to quash rumors that it would be rescued by the state and forced other private companies in Germany to consider an emergency intervention.
A gain of almost 6 percent in its share price over the last week – buoyed by an overall rise in European banking stocks – has done little to erase that reality.
Nor does it mask the fact that the bank still faces a series of potentially very expensive lawsuits and regulatory investigations. The bank set aside another €400 million in the third quarter in legal provisions – bringing its total amount of reserves set aside for legal troubles to €5.9 billion – but that is still unlikely to be enough.
Given that shaky background, Deutsche Bank’s bonus pool could determine whether or not it earns a profit this year.
It’s a message the bank seems to have received. According to financial circles, the management board is discussing plans to significantly reduce spending on bonuses.
One option would be to eliminate the cash segment. Last year, about half the bonuses were paid in cash. The awards could be paid out exclusively in stock instead. That could save the bank €800 million, according to analyst Stuart Graham of Researchhaus Autonomous.
Another possibility would be to extend the payments over an even longer time frame. In 2015, around half of the awards were to be paid out over at least four years.
Even if consideration is already being given to such options by top managers and monitors, no final decisions have been made.
How severe the bonus cuts are depends, like so much else these days, on a settlement with the U.S. Justice Department over alleged fraud in the sales of mortgage-back securities before the 2008 financial crisis. The Americans opened negotiations by calling for $14 billion in damages and raised fears that the penalties could be too much for the financial institution.
Chief Executive John Cryan is trying to negotiate the penalty down as far as possible, and the bank continues to offer assurances that it is not currently planning to raise capital. But given that massive legal risk, many investors now believe a further injection of capital is unavoidable. So is another round of cost cutting.
Yet the legal uncertainty could force Deutsche Bank to delay any announcement of a new restructuring strategy until the second quarter of next year.
“You can say that the outstanding legal settlement has paralyzed the bank strategically,” a senior insider told Handelsblatt.
In a letter to employees published Thursday, Mr. Cryan emphasized the “remarkable” job the bank had done to keep its operating business above water amidst all the rumous and restructuring challenges swelling around them. Revenues climbed slightly from €7.3 billion to €7.5 billion in the third quarter and its operating profit – earnings before removing all the costs related to legal risks and restructuring – came in at a robust €4.6 billion.
Yet he also warned that more pain is on the way: “Unfortunately, we must anticipate that the situation will remain tough for some time to come,” Mr. Cryan said. “As we indicated at the time of our half-year results, we will have to accelerate and intensify our restructuring.”
As for bonuses, the bank is caught in a dilemma. Mr. Cryan fears that excessive cuts in performance premiums could frustrate employees already unsure about their future and convince the best to leave.
“We must anticipate that the situation will remain tough for some time to come... we will have to accelerate and intensify our restructuring.”
This would particularly endanger further market share in the crucial area of investment banking. Deutsche Bank is already losing market share by withdrawing from its own products and certain countries, and by reducing its client base in order to improve efficiency.
On the other hand, investors are demanding concessions.
“If Deutsche Bank should in fact require another capital increase, that would only work if bonuses are significantly reduced,” said one large shareholder.
The question is just how significantly. Mr. Graham from Autonomous Research calculated that a radical reduction in bonuses, and the retention of already awarded stock allocations, could free up as much as €2.8 billion in capital.
Michael Maisch is a deputy editor of Handelsblatt’s finance section and is based in Frankfurt. Christopher Cermak of Handelsblatt Global also contributed to this story. To contact the author: firstname.lastname@example.org