Deutsche Bank AG is poised to unveil details of its sweeping plan to shrink costs as co-Chief Executive Officers Anshu Jain and Juergen Fitschen try to revive profitability that’s consistently missed their target.
The overhaul, to be described Monday, may include branch closures and withdrawing from some investment-banking businesses, leading to thousands of job cuts, according to analysts and investors. The bank also will probably abandon its 12 percent return on equity target for next year, they said. The measure of profitability was 3.1 percent in the first quarter.
“Nobody believes this target is viable,” said Kian Abouhossein, a London-based analyst at JPMorgan Chase & Co. “It’s set to be scrapped and replaced by a lower one. Deutsche Bank is running at lower guided revenues now than when the target was introduced and with much more regulatory headwind than was foreseeable at that time.”
After a record fine for manipulating benchmark interest rates, Jain and Fitschen are under pressure to win over shareholders battered by the worst stock performance among global peers during the pair’s tenure. Deutsche Bank plans to sell part of its Postbank consumer unit and retreat from some of the 70 countries in which it operates. It may also need to cut 2 billion euros ($2.2 billion) in costs, more than 10 percent, in addition to about a billion euros of reductions left to achieve from the previous program, Abouhossein said.
First-quarter net income dropped by half to 544 million euros from a year earlier, as a 1.5 billion-euro charge for legal costs countered near-record revenue, Deutsche Bank said on Sunday. The investment bank boosted revenue 15 percent, helped by sales and trading of fixed-income products and equities. Consumer bank revenue rose 1 percent.
“I’d expect Deutsche Bank management to use this opportunity to make up lost ground with shareholders, thus announcing more bold measures,” said Michael Huenseler, who helps oversee about $16 billion at Assenagon Asset Management SA, which holds the lender’s stock. About 3,000 people in the retail bank may eventually be cut, and jobs in the investment bank also will be at risk, he said.
A spokesman for Deutsche Bank declined to comment on job reductions and other details of the strategy review. The Frankfurt-based lender’s stock has climbed 26 percent this year through last week to 31.58 euros, for a market value of 43.6 billion euros.
The company’s first-quarter earnings still beat the 256 million-euro average estimate of four analysts surveyed by Bloomberg. It was the second-best quarter by revenue, with the bank taking in 10.4 billion euros.
“These were good numbers,” said Christopher Wheeler, a London-based analyst at Atlantic Equities LLP. “The problem is capital. Despite raising all that money last year, capital and leverage are clearly still a problem for them.”
Deutsche Bank’s common equity Tier 1 capital ratio, a key measure of financial strength, fell to 11.1 percent from 11.7 percent. Further headwinds are expected, the firm said Sunday. Its leverage ratio fell to 3.4 percent from 3.5 percent at the end of 2014.
The bank was fined $2.5 billion last week by regulators in the U.S. and the U.K. for manipulating interest-rate benchmarks. The penalty is the biggest Deutsche Bank has paid for misconduct and comes on top of the 7.1 billion euros it spent on litigation in the past three years.
Among the firm’s outstanding legal threats to earnings are probes into the rigging of benchmark foreign-exchange rates, as well as investigations into mortgage- and asset-backed securities dealings and alleged U.S. sanctions violations.
“The investment bank’s revenues were solid,” said Alevizos Alevizakos, an analyst at Keefe Bruyette & Woods in London. “Equities and investment-banking fees were particularly impressive. The fact that they controlled costs at the unit is also a positive sign for the future.”
In the U.S., Goldman Sachs Group Inc., JPMorgan and Morgan Stanley have reported higher revenue from increased trading in the quarter with central banks poised to take diverging actions. The Federal Reserve is expected to begin raising rates later this year after the European Central Bank started a quantitative easing program and the Swiss National Bank roiled markets by abandoning its currency peg in January. Credit Suisse Group AG, the first among Europe’s largest banks to report earnings, said an increase in trading helped to boost profit at its investment bank.
Deutsche Bank said April 24 it plans to invest in transaction banking, asset and wealth-management businesses.
The company plans to cut about 150 billion euros of assets that are included when calculating the lender’s leverage ratio at the investment bank, according to a person with knowledge of the matter. That equates to a cut of about 18 percent of current assets, according to JPMorgan analysts’ estimates.