Deutsche Bank Cost Cutting Hints at New Banking Environment

Deutsche Bank announced it would retreat from up to 10 countries as it looks to save $3.8 billion in costs.

Deutsche Bank announced it would retreat from up to 10 countries as it looks to save $3.8 billion in costs.

The news came early Monday as the bank announced net profits nearly halved on a year-over-year basis to 559 million euros, or about $605 million. The fall was largely due to the bank’s payment of a legal settlement in its involvement in rigging the Libor, a scandal that involved many global investment banks whose employed traders and money managers would send requests to nudge the Libor a few basis points higher or lower. This illegal collusion, which occurred during the late 2000s both before and after the Global Financial Crisis, first came to regulators’ attention in 2012 when the Financial Times published an article stating that Libor manipulation had been standard since the early 1990s. Both regulators in the U.S. and London investigated activity between 2007 and 2009.

Despite the fall in profitability and the damage the bank has had to its reputation, revenues rose 24% on a year-over-year basis, with fixed-income and currency trading contributing most of the growth. Deutsche Bank has also expanded in several emerging markets and in Europe, where its activity in the sovereign bond markets has made it a key player in Greece’s debt restructuring. Deutsche Bank is one of Greece’s largest lenders. 

Non-Global Banking

Part of Deutsche Bank’s restructuring efforts focus on leaving several global hotspots where the bank has grown operations in recent years, but returns have proven disappointing. Finance and Strategy Chief Stefan Krause said the bank’s performance targets “continue to be challenging” and the bank will respond by trimming less profitable operations.

The bank announced it will leave between 7 and 10 countries where it currently operates, focusing instead on wealth management and transaction banking, where fixed commissions have helped boost the bank’s return on equity. While revenue growth has been strong, albeit volatile, in many of its global operations, unreliable profitability and the high cost of international operations are making the bank rethink its global strategy.

Deleveraging Plans

In addition to cutting low-returning operations, the bank also announced it would cut its use of leverage by 150 billion euros, or about $162 billion, by 2018. The effort will focus on cutting exposure to exotic financial instruments such as derivatives that are long-term, which is a lucrative but ultimately high-risk operation because it exposes the bank to potential losses over a very long period of time if volatility increases for the underlying instrument. The bank estimates the cut of these operations will lower revenues by about 600 million euros, or about $650 million.

The bank’s cost-cutting and restructuring efforts are targeted at providing higher returns so that the bank can pay at least 50% of profits in the form of dividends over the next three to five years, which Chief Financial Officer Stefan Krause announced is the bank’s strategic goal. Krause also said the bank would consider selling part of Postbank in a cash-raising operation slated before the end of 2016.