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Deutsche Bank Lowers Investment Banking Pay

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Past errors seem to be costing Deutsche Bank AG (DB - Free Report) dearly. The German bank recently announced a 14% deduction in pay for investment bankers, raising concerns about whether the European banking sector has actually recovered from the financial quagmire.

The pay cut comes after the bank reported a surprise loss for the quarter ended Dec 31, 2013, as expenses related to court settlements and investigations into its past misconduct weighed significantly on profitability. Deutsche Bank is embroiled in a number of litigations related to the U.S. subprime mortgage crises. Moreover, it has been charged with substantial fines for its role in rigging benchmark interest and currency rates.

With costs denting nearly the entire corporate and investment banking revenues of Deutsche Bank in the final quarter of 2013, the segment’s revenues registered a 27% year-over-year decline. The bank’s income from trading fixed income, currencies and commodities – the stronghold of its investment banking business – was hit the most in the sluggish economic backdrop. Further, the whopping 95% cost to income ratio in the segment indicates that this global banking major is struggling to trim expenses.

The above-mentioned setbacks resulted in the salaries, bonuses and other benefits in its corporate banking and securities division going down to €5.3 billion and the employee headcount dropping 2%. Further, with management’s expectation of fixed-income trading continuing to remain weak in Europe and increased litigation costs eating into the bank’s profitability, Deutsche Bank might be in for a tough time ahead.

We believe that the slash in remuneration for the investment banking division might intensify Deutsche’s woes. Notably, the weakness in fixed-income trading across Europe has hit many major banks in the continent like Deutsche Bank and Barclays PLC (BCS - Free Report) and has been a drag on better-performing areas such as equities trading. Therefore, unless the cost to income ratio improves, banks will be compelled to implement aggressive cost cuts in the near future.

Deutsche Bank currently carries a Zacks Rank #2 (Buy). Some other foreign banks worth consideration include HDFC Bank Ltd. (HDB - Free Report) and The Royal Bank of Scotland Group plc (RBS - Free Report) . Both these have a same Zacks Rank as Deutsche Bank.

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