Bloated Banks

Down With the Costs!

Munich Re Hauptversammlung
Maybe remove a letter or two to cut costs?
  • Why it matters

    Why it matters

    Many European banks are plagued by high costs and low revenues, and leftover spending habits from the past have made banking one of the most wasteful industries. Deutsche Bank’s new co-CEO aims to implement an aggressive program to attack costs.

  • Facts


    • John Cryan will announce details on the new strategy by the end of October.
    • The investment banking industry spends on average 72 cents per euro of revenue. Spending by many U.S. banks is about a third lower than Deutsche Bank.
    • European banks suffer from a deeply entrenched culture of poor cost control, the author argues.
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John Cryan will not be content with the better return figures.

When the British banker presented his first quarterly numbers as co-chief executive of Deutsche Bank today, he pointed to a tolerable result. But there are large gaps between the returns at Germany’s largest bank and his own standards – gaps the former finance chief of UBS, who was responsible for restructuring the Swiss bank, wants to close as quickly as possible.

The major Frankfurt bank’s new great white hope intends to announce details on a new strategy by the end of October. One of his most important starting points will be exploding costs, which he is currently examining very closely. Deep cuts are to be expected, and the message is clear. “We have allowed ourselves to become too inefficient,” Mr. Cryan wrote in a letter to employees when he began work in early July.

Deutsche Bank isn’t the only lender faced with this problem. Europe’s major banks – Barclays, Credit Suisse, RBS and others – have a cost problem. Overstaffing with excessively expensive personnel, bureaucratic processes, outdated IT systems, too many non-automated activities, poor investments and drastic increases in legal costs have allowed banking to deteriorate into probably one of the most wasteful industries.

The problem lies in a deeply entrenched culture of poor cost control. In the years before the financial crisis, banks could draw on unlimited resources. Profits were abundant, thanks to lax regulations, high revenues and enormous debt leverage. This prompted banks to splurge on by far the highest paid employees of any industry, even employees who were of no importance in daily operations, such as those in human resources.

If the German automobile industry had been this inefficient in recent years, it might very well no longer exist today.

But the golden years ended long ago. High equity capital requirements, substantially lower revenues, the low-interest phase and costly litigation have led returns to fall to an alarmingly low level.

All large banks have tried to offset these problems with cost-cutting programs worth billions, but they have yet to pay off. In light of rising legal costs and declining revenues, banks have discovered that they are running just to stand still when it comes to reducing spending.

For instance, the large investment banks have reduced their cost base by three percent in the last five years, according to figures by the Boston Consulting Group. But the industry was recently spending 72 cents per euro of revenue, compared to 65 cents in 2010. Most recently, Deutsche Bank even spent 85 cents per euro of revenue. Many U.S. banks spend a third less, while Australians spend only half as much as German banks.

If the German automobile industry had been this inefficient in recent years, it might very well no longer exist today. In fact, when it comes to costs, the banking sector could learn a thing or two from automaker Daimler and others: a high degree of automation, non-bureaucratic processes, a low real net output ratio and a focus on core competencies.

Deutsche Bank and its rivals are more like sprawling financial conglomerates that, despite high costs, are still trying to dance at all weddings in the financial world.

Costs are also a key issue for shareholders, and one in which they have had the least confidence in the top management of many banks. But the top management shakeups at many large banks in recent weeks offer an opportunity for drastic cuts, so as to make the lenders better prepared for the future and more profitable once again.

From John Cryan at Deutsche Bank to Bill Winters at Standard Chartered, Tidjane Thiam at Credit Suisse and John McFarlane at Barclays, they all know that they must cut costs drastically, or they will fail.

The fact that this will slash tends of thousands of jobs is as bitter as it is necessary. It is also unavoidable that the still-exorbitant salaries at major banks will have to continue approaching pay levels in other, often more successful industries. These cuts will not only affect the trading business, notorious for its pay excesses. The retail banking business will also experience cutbacks, be it through the automation of processes, digitization or the closing of branches.

The new generation at the top of Europe’s banks is enjoying a leap of faith among shareholders and employees. Mr. Cryan, and others like him, must also use this goodwill to push through unpleasant measures.


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