Germany’s flagship lender announced actions to reshape its largest division, the troubled Corporate & Investment Bank (CIB) and additional cost-cutting measures, after posting a 79 percent drop in net profit in the first quarter.
The cuts focusing on the United States and Asia, will result in significant reduction in workforce through the rest of the year and include a scaling-back of its business with hedge funds. The cuts are also a move to become more focused on its European corporate customers and walk away from ambitions to be a top global securities firm.
“The bank will scale back activities in US Rates sales and trading, shrinking the balance sheet, leverage exposure and repo financing while remaining committed to its European business, which given its scale and relevance to our client base generates more attractive returns” the bank said in a statement Thursday.
Deutsche Bank reported income before income taxes of 432 million euros, versus 878 million euros in the first quarter of 2017. Net income was 120 million euros for the first quarter of 2018, versus 575 million euros in the prior year period. CIB revenue in the first quarter of 2018 were 3.8 billion euros, down 13% year-on-year, while in 2017 was down 25 percent compared with 2015. The division employed more than 41,000 staff at the end of 2017, up 4 percent from 2015, but key staff have left.
Thursday's announced cuts and weaker-than-expected earnings follow weeks of turmoil at the troubled German lender including the ouster of John Cryan, its chief executive. Retail specialist Christian Sewing took over as new chief executive officer this month. His appointment had suggested a shift away from the investment bank.
Sewing, 47, a German national and member of the management board since 2015, has a background in retail banking, auditing and risk. He joined Deutsche Bank in 1989 and has worked in Frankfurt, London, Singapore, Tokyo and Toronto.
On April 12, Standard & Poor’s said the lender's long-term rating could be downgraded, because the recent management change highlights “strategic challenges” and could prolong the restructuring. The ratings agency added it would decide by the end of May at the latest whether to downgrade Deutsche, once further details of the new leadership’s strategy were known.
“We are not strong enough in [some] areas,” Sewing said on the group’s CIB in the statement. “We have to act decisively and to adjust our strategy. There is no time to lose as the current returns for our shareholders are not acceptable.” He didn't provide numbers showing how deep the cuts to the investment bank will be. He said however that “ cutbacks will be painful, but they are unfortunately unavoidable if we want to be sustainably profitable in the best interests of our bank, our clients and our investors.”
Analysts welcomed the plan in principle but remained cautious
“We applaud [Mr] Sewing for getting full management support for a ‘shrinkage’ plan so quickly. What we are missing is timeframe and details,” The Financial Times cited Kian Abouhossein, an analyst at JPMorgan as saying.
The investment bank shift “appears to have some logic,” Andrew Coombs, an analyst at Citigroup, wrote in a note to clients, according to Bloomberg. “But we fear these steps could also have unintended consequences” for the rest of the business and “put even further pressure on both the capital position and earnings” in the short term.
Highlights from Deutsche Bank’s strategy on its CIB
— To focus our Corporate Finance business on industries and segments which either align with our core European client base or link to global financing and underwriting products in which we enjoy a leadership position. We will reduce our commitment to sectors in the US and Asia in which cross-border activity is limited.
— To scale back our activities in US Rates by shrinking our balance sheet, leverage exposure and repo book in particular. At the same time we will invest in our European Rates business which is one of our proven strengths.
— To undertake a review of our global Equities business with the expectation that we will reduce our platform. This includes our Global Prime Finance business where we will focus on maintaining our deepest client relationships. We will inform you in due course how we intend to position the Equities business overall.
Deutsche Bank shares fell 3.5 percent at 9:04 a.m. in Frankfurt trading, but later recovered the losses and were trading up 0.5 per cent at 10.20am. The stock is one of the worst performers among European banks in 2018. And now after Trump's “America First”, Deutsche Bank says “Europe First”.