Deutsche Bank has got a cost problem at its corporate and investment bank. In the first quarter of 2018, the cost/income ratio in the unit was nearly 95%.
Deutsche's new CEO Christian Sewing knows this. He is cutting costs: Sewing said today that he wants to reduce spending in the investment bank by €1bn by the end of 2019, implying a reduction of nearly 8% on last year. He's already eliminated free bananas and 600 people (mostly in the U.S.), leaving another 6,400 employees (at least ) to go. Equities staff are in the firing line. So too are prime broking staff. So too are corporate financiers in non-key sectors, along with U.S. rates traders, contractors, consultants, and anyone with the bad luck to be supporting the staff who've fallen out of favour.
In particular, Sewing is coming for Deutsche's most senior staff: in today's speech he said Deutsche is,"in the process of significantly slimming down the two layers below the Management Board". This means directors and managing directors (MDs): if anyone at Deutsche deserves to be worried by Sewing's statement today, it's those at the top of the hierarchy.
Deutsche Bank is already consolidating teams in M&A
Deutsche insiders say the bank is already busy consolidating its investment banking teams. As we reported previously, many of Deutsche Bank's European M&A teams rank outside the top 10 (some rank outside the top 20), making their continued existence questionable in a world where Sewing says the German bank is all about focusing on its strengths.
However, the consolidation is understood to be focused on analyst, associate and VP level bankers alone. DB juniors in London, Madrid and Milan are being placed into a single pool, as are juniors covering resources, infrastructure and utilities, and then healthcare, consumer and retail. While this sounds a lot like cost cutting, it's apparently more about managing working loads and giving juniors in Europe exposure to deals elsewhere. Deutsche declined to comment.
While juniors in IBD are being squeezed into consolidated teams, there are reasons to thnk that Sewing will struggle to make an impression on Deutsche's 700 most expensive directors and managing directors across the bank. As the chart below shows, their numbers were remarkably similarly distributed in 2017 and 2015. It seems that as former CEO John Cryan sought to reward and retain top staff after withholding performance bonuses in 2016, he felt compelled to lavish Deutsche's key revenue earners with bonuses equal to those they received previously - and that there was little flexibility on their numbers. Deutsche's best people have the whip-hand.
Of course Sewing may feel differently as he hacks away at the business areas mentioned in today's speech. Yet, Sewing will need to sustain revenues in the investment bank whilst cutting costs. If he's to succeed, he will need to go after Deutsche's flabby MDs and Ds. Some are likely hanging on for their incredibly generous pension pots (based on the highest average five year salary of the past decade and available at the age of 62) and won't be going anywhere of their own accords. If he's to get rid of them Sewing will therefore need to pay them off. This is a problem in itself: after Sewing disclosed that Deutsche Bank will likely have €800m in severance costs this year, the bank's share price fell to €10.4, its lowest level since the near death experience of autumn 2016.
The low share price isn't likely to go down well with the 700 key staff who feature in the table below. At Deutsche, anyone earning over €500k had the entirety of his/her 2017 bonus deferred as Deutsche Bank stock this year. Since January, any deferred stock bonuses have fallen 38% in value. Nor does there seem any chance whatsoever of Cryan's retention bonuses paying out now that the stock is less than half the strike price. Sewing could yet have a mutiny on his hands. Keeping the bulk of the 700 staff below may be a luxury he cannot afford.
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