European Banks' Biggest Challenges and How They're Tackling Themby
New bosses at Deutsche Bank, Credit Suisse face capital hurdle
Barclays to speed cuts; Standard Chartered's bad loans rising
As four of Europe’s biggest banks prepare to restructure under new management, here are some of their main challenges and how they are dealing with them.
Q - What do investors want new CEO Tidjane Thiam to do?
A - Focus more on wealth management, less on investment banking. The “strategic” parts of the wealth management unit generated a 25 percent return on regulatory capital in the first half. The equivalent parts of the securities unit returned 17 percent.
Q - How does he plan to do that?
A - By investing in Asia and being “ruthlessly selective” about what the bank does, as Thiam said in a memo on his first day. He has described Asia as a pie that is “growing faster than your ability to eat it.” He will flesh out his strategy on Wednesday.
Q - What about capital needs?
A - Thiam may raise as much as 8 billion francs ($8.4 billion) selling stock, people familiar with the matter have said. Credit Suisse may eventually have to hold common equity equivalent to 3.5 percent of its assets, a person with knowledge of the situation said. Equity stood at 2.7 percent in June.
Q - What’s the outlook for jobs?
A - Cuts may be coming. Newspaper Schweiz am Sonntag reported that Thiam may announce as much as 2 billion Swiss francs of cost cuts this week.
Q - What’s the biggest issue?
A - Capital. Even after tapping investors for almost 12.5 billion euros ($14.2 billion) in the last two years, Deutsche Bank is still the most leveraged of Europe’s large banks. Co-Chief Executive Officer John Cryan may forgo a 2015 dividend to preserve capital.
Q - How can Cryan increase profit?
A - Reducing costs. In April, Deutsche Bank said it would cut 3.5 billion euros of gross expenses by 2020. Some analysts want a net goal after previous cuts didn’t lift profit.
Q - Plans for the investment bank?
A - The company said in April it would shrink assets at the unit by as much as 17 percent by the end of 2018. Some analysts predict Cryan, who took over in July, will announce deeper cuts when he presents his strategy on Oct. 29.
Q - What about retail banking?
A - Deutsche Bank plans to sell Postbank, one of its German consumer units, five years after completing the purchase of the bank. It employs almost 15,000 people.
Q - Where is the firm looking for growth?
A - Deutsche Bank said it will invest more than 1.5 billion euros in asset and wealth management and transaction banking. The transaction bank wants to grow in Asia and the U.S., while the money management business is hiring advisers for wealthy clients.
Q - Where does their restructuring stand?
A - Barclays announced an overhaul last year and is further along than the other banks. By the end of June, it had reached capital goals it set for 2016.
Q - What did that entail for the investment bank?
A - Deep cuts. Barclays said it would wind down more than 40 percent of assets there. It has almost concluded a plan to cut about 7,000 jobs at the unit.
Q - What about its other businesses?
A - Barclays is focusing on the U.K., U.S. and South Africa, its three major markets. That means investing in corporate banking as well as its credit-card business, wealth management and U.K. consumer banking.
Q - Where to from now?
A - Chairman John McFarlane is speeding up the bank’s plan to wind down assets after ousting Antony Jenkins as CEO. Former JPMorgan Chase & Co. banker Jes Staley is the leading CEO candidate, a person with knowledge of the matter said.
Q - Is the bank’s focus on Asia a problem?
A - Yes. The bank is suffering after commodity prices slumped to a 16-year low and concern spread that China’s economy is slowing more than expected.
Q - How does that hurt them?
A - Souring loans. Income at the corporate and institutional bank division fell 10 percent in the first half to $4.8 billion as loan losses piled up in India and China.
Q - How about capital?
A - The bank’s common equity Tier 1 capital ratio is 11.5 percent, in the middle of its target range of between 11 percent and 12 percent.
Q - Is that good enough?
A - Maybe not. Analysts say new CEO Bill Winters may have to raise between $4 billion and $10 billion of capital to cover a shortfall that could be revealed in this year’s Bank of England stress tests in December.