Deutsche Bank AG (DBK) co-Chief Executive Officer Anshu Jain is cutting compensation to placate shareholders as Europe’s debt crisis slashes financial-industry jobs, leaving workers fewer opportunities to defect.
“We need to further address both the absolute level of compensation and the relative balance between rewards for shareholders and those for employees,” Jain said yesterday on a conference call. “Compensation must be clearly and visibly aligned to sustainable performance.”
Investment banks are trimming workforces to reduce costs as the debt crisis curbs trading and leads to a slump in stock and bond offerings. The dearth of jobs in the sector will make it easier for Jain, 49, to get employees at Germany’s biggest bank to accept lower pay for lack of alternatives, said Dirk Becker, a Kepler Capital Markets analyst in Frankfurt.
“A few years ago, no one in the investment-banking industry would dare cut compensation as they’d lose their talent,” said Becker, who recommends investors buy Deutsche Bank shares. “Now, many of the banks are cutting pay and that’s good for shareholders.”
Deutsche Bank rose 0.5 percent to 25 euros as of 9:58 a.m. in Frankfurt. The stock has fallen 15 percent this year, compared with a 0.1 percent decline for the 38-company Bloomberg Europe Banks and Financial Services Index.
The lender said yesterday it will cut about 1,900 jobs by the end of the year, including 1,500 positions in its investment bank and related infrastructure areas. Most of the reduction will take place outside of Germany, the firm said.
Those measures will contribute about 350 million euros ($431 million) to a 3 billion-euro cost-savings plan, the company said in a statement. Deutsche Bank employed 10,079 at the investment bank at the end of June, company filings show.
The lender’s announced cuts boosted the number of job reductions announced by western European financial firms this year to more than 25,000, following more than 107,000 in 2011, data compiled by Bloomberg show.
Deutsche Bank is seeking to bolster capital as it prepares for new rules intended to prevent a repeat of 2008’s taxpayer- funded bailouts. The firm announced last month a risk-reduction plan to meet the requirements and yesterday said it will “apply all capital levers at its disposal before considering raising equity from investors.”
JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc. (C), Goldman Sachs Group Inc. and Morgan Stanley (MS) had combined first-half revenue of $161 billion, down 4.5 percent from 2011 and the lowest since $135 billion four years ago. The firms blamed the decline on low interest rates and a drop in trading and deal-making as the European-debt crisis persists and growth in the U.S. and China slows.
“The European crisis has developed closer toward our more grim scenario than our better case scenario over the course of the past two years,” Jain said yesterday, according to a Bloomberg transcript of the call. “Our prospects and our future view on profitability is different today than it was in 2010.”
Deutsche Bank said yesterday that second-quarter pretax profit at its investment bank slid 63 percent to 357 million euros from a year earlier. That missed the 835 million-euro average estimate of eight analysts surveyed by Bloomberg.
“Deutsche has a first-class investment-banking franchise but it has recognized the need to take cuts,” said Christopher Wheeler, a Mediobanca SpA (MB) analyst in London who has the equivalent of a sell recommendation on the shares. “It is very difficult in this environment to make those cost savings work because revenue is often going against you and you don’t have any leverage. The 3 billion-euro target is very bold.”
Colin Fan, 39, and Rob Rankin, 48, succeeded Jain as head of the investment bank, known as corporate banking and securities, at the beginning of June. Jain became co-CEO with Germany head Juergen Fitschen, 63, after CEO Josef Ackermann, 64, stepped down at the end of May.
Deutsche Bank cut employee compensation and benefits at the division 7 percent to 1.29 billion euros in the second quarter, according to company filings yesterday. The 14,542 employees at the unit, which encompasses its investment bank and global transaction banking, earned 88,846 euros on average, down 1.8 percent from 90,452 euros a year earlier, the filings show.
Non-interest costs at the investment bank climbed to 3.05 billion euros in the quarter from 2.91 billion euros. Analysts surveyed by Bloomberg estimated costs of 2.77 billion euros for the unit.
“We will stay committed to attracting and retaining the best talent,” Jain said. “Our clients expect that. But we firmly believe that the industry as a whole will have to change its compensation model.”
The bank’s compensation as a ratio of net revenues rose to 42 percent in the second quarter from 39 percent a year earlier as the firm accrued more deferred pay, according to a presentation on Deutsche Bank’s website.
The German bank will probably reduce bonuses over several years as it pays out compensation deferred from previous years, said Kepler’s Becker.
Even in the worst of times, there’s competition for the most experienced bankers. Deutsche Bank’s head of flow-credit trading, Antoine Cornut, and Tom Higbie, a credit analyst, left the firm last week for hedge funds.
“The war for talent may have ebbed, but it looks to be part of Deutsche Bank’s strategy to still treat its employees better than competitors to position the firm,” said Christian Muschick, an analyst at Silvia Quandt Research GmbH in Frankfurt, who has the equivalent of a hold recommendation on the shares.
Muschick said Credit Suisse Group AG (CSGN) has been “more aggressive” in reducing staff.
Credit Suisse announced plans last year to cut 3,500 jobs and lower expenses by 2 billion francs ($2.05 billion). The Zurich-based bank, Switzerland’s second-biggest, said July 18 that it was planning to cut an additional 1 billion francs of costs by the end of 2013, without providing details of job losses.
Larger rival UBS AG (UBSN), which is also based in Zurich, unveiled 3,500 job cuts last year, with about 1,575 of those at the investment bank.
“Anshu’s never going to make his people vulnerable, but he’s aware that there’s a very difficult market out there,” Mediobanca’s Wheeler said.
UBS will cut bonuses further than Deutsche Bank because the Swiss firm is reducing the scale of its investment bank, Becker said.
“Deutsche Bank is limited in its ability to cut compensation because it wants to hold on to bankers as they have more ambition to succeed in investment banking,” Becker said.
The firm’s investment bank has about 31,799 employees, including back-office workers, the highest among global peers, Kian Abouhossein and Amit Ranjan, JPMorgan analysts, estimated in a July 3 note.
Without job cuts in the current “weak” environment, Deutsche Bank’s revenue per employee at the investment bank could fall to the lowest compared with Goldman Sachs, Morgan Stanley, UBS, Barclays Plc (BARC) and Credit Suisse in 2013, the analysts said at the time.
Jain said his call for “a cultural change” in the financial sector extends beyond compensation. Deutsche Bank will seek to “maintain first-class compliance and risk management systems, and do our best to root out bad behavior,” he said.
The German bank raised its estimate for potential litigation losses for which it hasn’t set aside provisions to 2.5 billion euros yesterday from 2.1 billion euros in April. Chief Financial Officer Stefan Krause, 49, said on the conference call with Jain that the increase partly reflected additional cases, without identifying them.
Deutsche Bank is one of at least a dozen banks being probed by regulators over claims they artificially understated their cost of borrowing or allowed traders to manipulate interest rates and profit from bets on interest-rate swaps. Barclays Plc, Britain’s second-biggest bank by assets, was fined a record 290 million pounds ($456 million) in June for rigging the London interbank offered rate.
The German bank, which is also the subject of civil actions, reiterated yesterday that it’s co-operating with regulators and said an internal investigation has so far cleared current and former management board members of wrongdoing.
The internal rates probe “found that a limited number of employees, acting on their own initiative, engaged in conduct that falls short of the bank’s standards, and action has been taken accordingly,” Paul Achleitner, 55, Deutsche Bank’s supervisory board chairman, said in a letter to employees. The letter, dated yesterday, didn’t specify the action taken.
“The time for vague promises of cultural change in our industry is long gone,” Jain said yesterday on the conference call. “Our investors, but also our clients, regulators, governments and the public, want to see change.”