Deutsche Bank AG, Europe’s biggest bank by assets, will cut jobs and review its pay practices to help boost profitability as capital requirements rise and Europe’s debt crisis drags on.
“Compensation practices are one important way to achieve behavioral change and align incentives to longer-term sustainable performance on behalf of all stakeholders,” the Frankfurt-based bank said in a statement. Co-Chief Executive Officers Anshu Jain and Juergen Fitschen laid out their strategy today after taking over from Josef Ackermann at the end of May.
The bank will increase the vesting period for deferred bonuses for about 150 members of senior management to five years from three, and will make a single payout after the deferral period ends rather than staggered payments every year, it said. The company will also appoint an external panel to review compensation structures, whose findings will influence remuneration for this year.
Deutsche Bank said today it plans to cut costs by 4.5 billion euros ($5.8 billion) to help boost after-tax return on equity to at least 12 percent by 2015 from 8.2 percent in 2011. The company, which announced plans in July to eliminate 1,900 jobs, will reduce headcount further, Fitschen said, without elaborating. Financial firms worldwide are under pressure from regulators, shareholders and politicians to cut compensation costs as volatile markets and stricter rules hurt profitability.
The German bank will incur 4 billion euros of costs to achieve its annual savings target, it said.
Deutsche Bank plans to reduce regional back-office activities and centralize procurement, as well as cut down on investment in information technology. Those steps will account for almost 40 percent, or 1.7 billion euros, of the planned savings, the bank said. The banks will also save about 300 million euros by selling some 40 properties and moving staff to lower cost locations.
The shares rose 4.1 percent to 33.15 euros in Frankfurt trading, bringing the gain this year to 13 percent.
Deutsche Bank follows rivals in recalibrating profit goals. Credit Suisse Group AG 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 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 said in November that it’s targeting an after-tax ROE of 12 percent to 17 percent starting in 2013.
Deutsche Bank’s bonus payments as a percentage of net revenue have fallen from 22 percent in 2006 to 11 percent last year, it said, adding that it’s “committed” to reduce bonuses in relation to business performance further. Deutsche Bank shrank its 2011 bonus pool by 17 percent and deferred about 61 percent of the total amount, the company said in February.
Deutsche Bank decided against putting an absolute cap on compensation, Jain, 49, told journalists in Frankfurt today. “We are part of a competitive environment,” he said. “One size fits all doesn’t make sense.”
Jain last year took the biggest pay cut on the firm’s management board after a drop in revenue at his corporate- and investment-banking unit. He earned 5.81 million euros in salary and bonuses for 2011, down from 7.55 million euros, according to the figures the bank disclosed in its annual report in March.
Fitschen, who headed business in Germany before becoming co-CEO with Jain, took a 4.7 percent cut to 2.85 million euros last year, tying for the lowest pay among all management board members with consumer-banking head Rainer Neske.
Fitschen, 64, said the bank has already chosen the chair for its external compensation panel, without identifying the person. The panel will include industry leaders from Germany, the U.K., the U.S. and the Asia-Pacific region. It will formulate core principles and minimum standards for future compensation structures and practices as well as help define the appropriate level of disclosure, the bank said.
Deutsche Bank also said that it 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.
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 bank cut about 14 billion euros of risk-weighted assets in July and August, Chief Financial Officer Stefan Krause said today at conference with analysts. Deutsche Bank said it plans to reduce risk-weighted assets by 45 billion euros between the end of June this year and the beginning or March next year.
The reduction between the middle of this year and the end of the first quarter of 2015 is about 135 billion euros, of which about 100 billion euros are located at the investment bank, the company said today in its statement.
In response to a question on investigations by global regulators into Deutsche Bank’s role in manipulation of the London Interbank Offered Rate, Jain said he couldn’t make any “final” comment until the probes are concluded. He referred to remarks supervisory board chairman Paul Achleitner made in July.
Achleither said in a July 31 letter to employees that a probe by Deutsche Bank “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.”
The German bank, which is also the subject of civil actions, reiterated July 31 that it’s co-operating with regulators and said the internal investigation has so far cleared current and former management board members of wrongdoing.