FRANKFURT (Reuters) - Deutsche Bank (DBKGn.DE) is to cut bonuses, axe more jobs and sell assets to meet tougher capital rules, its new chief executives said on Tuesday as they pledged to end a risk-taking culture driven by short-term gain.
Joint CEOs Anshu Jain and Juergen Fitschen told shareholders they will not raise new cash; instead they plan to put Germany’s flagship international bank on a crash diet that will involve a 4-billion euro ($5 billion) restructuring charge and hiving off 125 billion euros of risky assets into a segregated unit.
“Anshu’s Army”, the investment banking arm Jain previously built into a global force in derivatives trading, will feel the worst of the pain; their old boss showed little sentimentality in writing his prescription for saving 4.5 billion euros a year.
Jain, who led loyal legions of investment bankers for eight years before his promotion on June 1, said he expected job cuts “over and above” the 1,900 positions already announced. He will also move backroom hires away from pricey London and New York as the lender adapts to a cyclical and structural downturn in banking while seeking to retain a full-service, global business.
“The medium-term economic and regulatory outlook is challenging, hence we need to significantly improve our operating performance and efficiency,” Jain and Fitschen said in a statement setting out their strategy after 100 days in office.
Just as the euro zone debt crisis has caused first-half profits to tumble at Deutsche, tougher regulations have forced lenders to shore up capital and change their business models to prevent a repeat of the 2007-08 financial markets crisis.
Investors relieved at avoiding a cash call drove Deutsche shares up over 4 percent, despite a warning dividends will not rise until profits are ploughed into meeting new capital ratios.
Echoing comments on Monday by the new CEO of troubled British rival Barclays (BARC.L), the Deutsche duo spoke of an “imperative” for cultural change in the wake of global crisis:
“The burden of cultural change will fall disproportionately in the investment bank,” said Jain, who said his former unit had been responsible for the “most asymmetric” division of revenue between bankers and shareholders in previous years.
“The payout ratio, it’s got to go down,” he said of the level of bonuses. “Employees must make their contribution.” Jain himself saw his own earnings drop by a quarter last year, though he still earned 5.8 million euros in 2011 before becoming CEO.
Deutsche said it would alter pay to encourage its bankers to focus on “longer-term sustainable performance”. Calling that a “behavioural change”, it was an implicit acknowledgement that chasing rapid, but riskier, returns has proved expensive.
Bonuses will be cut in relation to business performance and senior managers will have to wait five years to receive bonus share awards, rather than have them staggered over three years. Already an independent panel is reviewing the structure of pay, and its findings will affect this year’s bonuses.
Annual bonuses worth sometimes millions of dollars and many times the typical earnings of European voters have been a lightning rod for political protests against banks and have been blamed for promoting the risk-taking that led to the crisis.
Deutsche Bank shares closed 4.1 percent higher at 33.15 euros, outperforming Europe’s bank sector: “The main thing is that they will be able to avoid a capital increase,” said analyst Heino Ruland of Ruland Research.
“People are looking at the costs and thinking of the saying: ‘Better an end to horror than horror without end’.”
Jain stressed the “challenging” outlook for both retail and investment banking and insisted savings were vital to improve profit margins: “We do not feel comfortable telling you a revenue story,” he told investors. “It will be a cost story.”
Retail, asset management, wealth management and investment banking divisions had been run as “silos”, operating largely independently, Jain noted. He now saw savings coming from combining asset and wealth management and enhancing cooperation with the investment bank - a model not unlike that used by Swiss rivals Credit Suisse CSGN.VX and UBS UBSN.VX.
Global banks are battling to adjust to difficult markets and most rivals are axing jobs. Japan’s Nomura (8604.T) last week said it will make cuts in its equities and investment banking.
Deutsche wants to cut costs to below 65 percent of income from a hefty 83 percent in the second quarter and a post-tax return on equity of at least 12 percent by 2015. It previously targeted a pre-tax return on equity of 25 percent, but managed only 6.8 percent in the second quarter. Like many others, it has scaled back expectations as building capital depresses returns.
CFO Stefan Krause said that, given the change in capital adequacy rules, Deutsche was not being any less ambitious in its earnings target, calling the previous 25 percent goal “very comparable to our 12 percent in the Basel III world”.
The bank confirmed its commitment to a universal banking model and its global footprint, saying its strategic priority was in the Asia-Pacific region, where it saw most growth.
It also plans to consolidate its real estate portfolio and may sell about 40 properties and shake up information technology. Too many infrastructure staff, Jain said, were “sitting in expensive locations in New York and London”. ($1 = 0.7821 euros)
Additional reporting by Ludwig Burger and Jonathan Gould in Frankfurt and Steve Slater in London; Editing by Alastair Macdonald