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Deutsche Bank Revamps Operations

by Zacks Equity Research

September 12, 2012 | Comments : 0 Recommended this article: (0)

DB KEY

In order to endure the sluggish investment banking and strict regulatory environment, Deutsche Bank AG (DB - Snapshot Report) announced additional expense management measures and reduction of risky assets. The revamp follows a 100-day evaluation made by the new co-CEOs – Juergen Fitschen and Anshu Jain.

Deutsche Bank plans to reduce the annual costs by €4.5 billion ($5.8 billion) by 2015. As part of it, the company will primarily slash more than 1900 jobs, mainly in the investment banking division. Further, the bank plans to reduce businesses at upscale locations such as New York and London as well as close its ineffective IT platform so that it can invest in a modified one.

Moreover, the bank strives to transform the compensation practices, which has been a primary concern for the investment banking industry. Hefty bonus payments have led to risky behavior on part of top management. The new policies implemented will include the chief executives of the company having their bonuses paid after five years, instead of the present practice of part-payment over a span of three years.

Also, in case of a reduction in profit levels of the bank or any instances of transgression, bonuses will be scrapped. The primary aim is to reduce risky decisions taken by the higher officials that are beneficial on a short-term basis, but bring long-term hazards.

Further, the bank announced that it has plans to streamline the investment banking division to reduce over dependency on this business.

Also, by trimming down risky assets, it will enhance the capital position as stipulated by the Basel III regulations. For this, the bank will shift €125 billion ($161.1) of risky assets to a non-core division. However, to keep pace with its peers in this regard, the bank still needs to undertake more effective measures. Management expects capital reserves to improve to considerably higher levels by 2015.

Moreover, the company has lowered its profit standards. It will target an after-tax return of 12% on equity (ROE), a considerable reduction from the previously targeted 25%.

Deutsche Bank, Germany's largest bank with large domestic retail operations, is one of the leaders in global banking. However, due to the recent financial crisis in the European markets, its earnings fell considerably. The company’s earnings in the second quarter of 2012 plummeted 45% year over year to €661 million ($852.0 million) and revenues went down 6% to €8.0 billion ($10.3 billion). We believe that the aforementioned measures will help the bank augment its declining revenues.

Similar to Deutsche Bank, in July this year, Ohio-based KeyCorp (KEY - Analyst Report) announced its plans to commence cost-curtailing measures to improve efficiency. The measures include closure of branches as well as job cuts.

Deutsche Bank currently retains a Zacks #4 Rank, which translates into a short-term Sell rating.

In order to endure the sluggish investment banking and strict regulatory environment, Deutsche Bank AG (DB - Snapshot Report) announced additional expense management measures and reduction of risky assets. The revamp follows a 100-day evaluation made by the new co-CEOs – Juergen Fitschen and Anshu Jain.

Deutsche Bank plans to reduce the annual costs by €4.5 billion ($5.8 billion) by 2015. As part of it, the company will primarily slash more than 1900 jobs, mainly in the investment banking division. Further, the bank plans to reduce businesses at upscale locations such as New York and London as well as close its ineffective IT platform so that it can invest in a modified one.

Moreover, the bank strives to transform the compensation practices, which has been a primary concern for the investment banking industry. Hefty bonus payments have led to risky behavior on part of top management. The new policies implemented will include the chief executives of the company having their bonuses paid after five years, instead of the present practice of part-payment over a span of three years.

Also, in case of a reduction in profit levels of the bank or any instances of transgression, bonuses will be scrapped. The primary aim is to reduce risky decisions taken by the higher officials that are beneficial on a short-term basis, but bring long-term hazards.

Further, the bank announced that it has plans to streamline the investment banking division to reduce over dependency on this business.

Also, by trimming down risky assets, it will enhance the capital position as stipulated by the Basel III regulations. For this, the bank will shift €125 billion ($161.1) of risky assets to a non-core division. However, to keep pace with its peers in this regard, the bank still needs to undertake more effective measures. Management expects capital reserves to improve to considerably higher levels by 2015.

Moreover, the company has lowered its profit standards. It will target an after-tax return of 12% on equity (ROE), a considerable reduction from the previously targeted 25%.

Deutsche Bank, Germany's largest bank with large domestic retail operations, is one of the leaders in global banking. However, due to the recent financial crisis in the European markets, its earnings fell considerably.

The company’s earnings in the second quarter of 2012 plummeted 45% year over year to €661 million ($852.0 million) and revenues went down 6% to €8.0 billion ($10.3 billion). We believe that the aforementioned measures will help the bank augment its declining revenues.

Similar to Deutsche Bank, in July this year, Ohio-based KeyCorp(KEY - Analyst Report) announced its plans to commence cost-curtailing measures to improve efficiency. The measures include closure of branches as well as job cuts.

Deutsche Bank currently retains a Zacks #4 Rank, which translates into a short-term Sell rating.

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Deutsche Bank Revamps Operations

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