Deutsche Bank AG said it will eliminate 1,900 jobs by the end of the year, including 1,500 at the investment bank and support areas, as part of an effort to save 3 billion euros ($3.68 billion).
Germany’s biggest lender, which employed 10,079 at the investment bank at the end of June, said most of the positions slated for removal at the unit will be outside Germany. The Frankfurt-based lender forecast “substantial costs” to achieve the savings without giving an exact figure in a statement to the stock exchange today.
The job reductions were prompted by a strategy review Anshu Jain and Juergen Fitschen, Deutsche Bank’s new co-chief executive officers, are conducting as the lender grapples with declining revenue from the investment bank, which reported a 63 percent decline in second-quarter earnings today. Pretax profit at the unit slid to 357 million euros, missing 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,” Christopher Wheeler, a Mediobanca SpA analyst in London who has the equivalent of a sell rating on the shares, said. “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.”
Sovereign Debt Woes
“The European sovereign debt crisis continues to weigh on investor confidence and client activity across the bank,” Jain and Fitschen said in the statement.
Investment banks are cutting staff to reduce costs as the debt crisis curbs trading and leads to a slump in stock and bond offerings. Deutsche Bank is reviewing its “absolute level of compensation” and the “relative balance between rewards for shareholders and those for employees” as part of a cultural change within the bank, it said.
“The time for vague promises of cultural change in our industry is long gone,” Jain said on a conference call with analysts and reporters. Deutsche Bank’s leaders are “totally determined to act quickly and decisively.”
The bank is also reviewing its codes of personal conduct to ensure they are in line with “its long tradition of doing business to the highest standards.”
Deutsche Bank is among the 18 banks being probed into possible interest-rate manipulation. The bank “continues to cooperate with regulators on Libor,” Stefan Krause, the chief financial officer, said on the conference call.
“No current or former member of the Management Board had any inappropriate involvement in the interbank offered rates matters under review,” Paul Achleitner, the chairman of the supervisory board, said in a letter to employees today.
“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,” Achleitner said.
Deutsche Bank, whose stock has declined 16 percent this year, pared losses to trade down 0.1 percent at 24.82 euros as of 5:03 p.m. The Bloomberg Europe Banks and Financial Services Index, which tracks 38 stocks, has fallen 1.1 percent since Dec. 31.
Deutsche Bank’s second-quarter profit dropped 46 percent to 650 million euros, the company said today, after last week reporting an estimated net income figure of about 700 million euros in a preliminary report. The bank said the euro’s decline against the U.S. dollar and British pound drove up costs in those regions relative to Germany.
Non-interest costs at the investment bank climbed to 3.05 billion euros in the quarter from 2.91 billion euros. Analysts estimated costs of 2.77 billion euros for the unit in a Bloomberg survey. Debt-trading revenue at the division fell to 2.18 billion euros from 2.35 billion euros. That compares with an analysts’ estimate of 2.13 billion euros.
Revenue from selling equity for clients plummeted 64 percent to 89 million euros in the second quarter from a year earlier while income from placing debt fell 11 percent to 284 million euros in the period, according to Deutsche Bank.
Deutsche Bank cut its net sovereign risks related to Greece, Italy, Ireland, Portugal and Spain to 3.91 billion euros at the end of March from 3.94 billion euros three months earlier, according to a presentation published on the company’s website. Risks related to Spain fell to 873 million euros from 1.36 billion euros while those related to Italy rose to 2.52 billion euros from 1.95 billion euros, the slides show.
The uncertainties stemming from the European debt crisis and the recovery in the U.S. as well as legal risks affect the outlook for Germany’s biggest lender.
“The current environment continues to result in significant lower levels of client activity, both in investment banking as well as in certain parts of our retail business,‘‘ Deutsche Bank said in its quarterly report today.‘‘We expect this to continue in the second half of the year.’’
‘‘Investors and companies are holding back from bond and share sales because of the high level of uncertainty on markets from Europe’s sovereign debt crisis,’’ said Michael Seufert, an analyst with Norddeutsche Landesbank in Hanover who recommends investors hold the stock. ‘‘Right now, the bank is focused on damage limitation and minimizing risk in this environment.’’
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley 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 driven by concerns about European government finances and slowing growth in the U.S. and China.
UBS and Commerzbank
UBS AG, Switzerland’s biggest bank, had a second-quarter loss at its investment bank, causing profit to slump 58 percent, according to an earnings report today.
Commerzbank AG, Germany’s second-largest bank, yesterday reported second-quarter pretax profit that fell short of analysts’ estimates after saying it would sell its stake in Ukraine’s Bank Forum JSC and take a charge of 286 million euros.
Compensation and benefits at the corporate and investment bank division, which comprises the investment bank and global transaction banking units, fell to 1.29 billion euros in the second quarter from 1.39 billion euros a year earlier, while severance payments rose to 45 million euros from 29 million euros, according to Deutsche Bank.
The bank’s compensation as a ratio of net revenues rose to 42 percent from 39 percent as the firm accrued a higher amount of deferred pay, according to a presentation published on Deutsche Bank’s website today.
Pretax profit at Deutsche Bank’s private and business clients unit, which includes its consumer-banking operations, fell to 398 million euros in the second quarter from 458 million euros a year earlier. That beat the 344 million-euro average estimate of eight analysts surveyed by Bloomberg and outstripped earnings at the investment bank.
The asset management division’s pretax profit slumped to 35 million euros in the second quarter from 227 million euros as the bank booked 50 million euros in costs related to a review of the unit and lower client activity, according to Deutsche Bank’s statement.
The units up for sale in that process were unable to win business during the review, according to the presentation. Deutsche Bank scrapped a plan to sell its RREEF infrastructure and real estate unit to Guggenheim Partners LLC in June after exiting talks over the sale of three other asset management units to the U.S. investor in May.
Deutsche Bank is ‘‘committed” to its asset and wealth management unit, according to the presentation.
Banks are under orders from regulators to raise capital to avoid a repeat of the taxpayer-funded bailouts of the 2008 financial crisis. Deutsche Bank, the third-least capitalized of Europe’s 10 biggest banks at the end of 2011, came under more pressure after Credit Suisse Group AG bowed this month to demands from the Swiss National Bank to increase reserves.
After announcing profit that missed analysts’ estimates last week, Deutsche Bank said it will expand its risk reduction program to meet new capital requirements, known as Basel III, that begin to take effect next year.
Deutsche Bank said it will “apply all capital levers at its disposal before considering raising equity from investors” to fulfill regulatory requirements. The bank plans to achieve a core Tier 1 ratio, a measure of a bank’s capital strength, of at least eight percent, a target that simulates a full implementation of the new capital rules, by the end of the first quarter of 2013.
Deutsche Bank expects its assets weighted according to risk will jump to 475 billion euros at the beginning of 2013 from 385 billion euros at the end of the year, assuming a gradual implementation of Basel III rules, according to the slides.