Deutsche Bank AG (DBK), Europe’s biggest bank by assets, will cut costs by 4.5 billion euros ($5.8 billion) and review pay practices to boost profitability amid higher capital requirements and Europe’s debt crisis.
Deutsche Bank will seek to increase its after-tax return on equity to at least 12 percent by 2015, the Frankfurt-based lender said in a statement today, from 8.2 percent in 2011. The company will incur 4 billion euros of costs to achieve its annual savings target by 2015 and plans to eliminate more jobs.
“The medium-term economic recovery and regulatory outlook is challenging, hence we need to significantly improve our operating performance and efficiency,” co-Chief Executive Officers Anshu Jain and Juergen Fitschen said in the statement. “It is not enough to adapt our strategy to customers’ changing demands; we also have to secure our competitiveness.”
The bank said it will extend the period for deferred bonus payouts to senior management and appoint an external committee to review compensation. Jain, 49, and Fitschen, 64, are outlining their strategy in Frankfurt today after taking over from Josef Ackermann, 64, in May. Investment banks are fighting to buoy profits as record-low interest rates and a drop in trading and deal-making curb revenue.
Deutsche Bank rose 1.7 percent 32.38 euros by 1:28 p.m. in Frankfurt trading, bringing the gain this year to 9.9 percent.
Deutsche Bank’s after-tax return on average active equity, a figure it uses to measure profitability, fell to 7.4 percent in the first half from 8.2 percent in 2011. The measure reached 20.4 percent in 2006, before the financial crisis led regulators to demand that banks set aside more capital.
To help reverse the slide in profitability, Deutsche Bank announced in July that it will eliminate as many as 1,900 jobs. The cuts, mostly outside Germany, will include 1,500 at the investment bank and support areas. Fitschen said today there will be more job reduction beyond those announced, though the number and location have not been decided.
Deutsche Bank follows rivals in recalibrating profit goals. Credit Suisse Group AG (CSGN) reduced its after-tax ROE goal to “more than 15 percent” from a previous target of more than 18 percent in February last year. Barclays Plc (BARC) Chief Executive Officer Antony Jenkins said yesterday that the London-based bank is seeking returns above its 11 percent to 11.5 percent cost of equity. UBS AG (UBSN) said in November that it’s targeting an after-tax ROE of 12 percent to 17 percent starting in 2013.
Deutsche Bank plans to reduce regional back-office activities and centralize procurement, as well as cut down on investment in information technology platforms. Those steps will account for almost 40 percent, or 1.7 billion euros, of the planned savings, according to the statement. The banks will also sell about 40 properties.
Global regulators are forcing banks to increase capital buffers to prevent a repeat of the taxpayer-funded bailouts that followed the collapse of Lehman Brothers Holdings Inc. Deutsche Bank’s capital levels trail those of Barclays of London and Zurich-based Credit Suisse and UBS, data compiled by Bloomberg Industries show.
Tougher rules from the Basel Committee on Banking Supervision, known as Basel III, that call for lenders to hold more reserves will begin taking effect at the start of 2013 and be fully implemented by 2019. Banks worldwide will be required to hold common equity of at least 7 percent of risk-weighted assets by 2019, and firms deemed systemically important, such as Deutsche Bank, will need more.
The German bank would be the least capitalized of seven European wholesale banks at the end of this year if 2019 rules were applied, Credit Suisse said in a note yesterday, citing company disclosures and estimates by the brokerage.
“We are under tremendous pressure to reduce risk-weighted assets,” Jain said.
Deutsche Bank plans to boost its core tier 1 capital level under full Basel III requirements to at least 8 percent by the end of the first quarter of 2013, and more than 10 percent by March 31, 2015, the company said today.
The bank plans to cut Basel III risk-weighted assets by 135 billion euros to boost capital ratios, including about 100 billion euros from the investment bank. The securities unit will aim for Basel III risk-weighted assets of less than 200 billion euros by 2015.
The de-risking process will be “very rapid,” Jain told reporters at the press conference. The bank plans to achieve 45 billion euros in reductions by the end of the first quarter and has already cut 14 billion euros in the first two months of the current quarter, incurring some trading losses, he said.
Even so, Jain said investment-banking revenues were solid in July and August.
Deutsche Bank also said it merged asset and wealth management with its exchange-traded-funds business to build an “efficient platform for future growth by eliminating as much duplication as possible.” The bank said that it wants to increase its pretax profit at the unit to 1.7 billion euros in 2015 from 800 million euros in 2011. The lender aims to reach 1 trillion euros of assets under management by 2015 at the unit.
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