Tuesday, April 28, 2015

Investors grim on Deutsche Bank's cutting costs strategy to retain global lender rating

Germany’s Deutsche Bank Monday unveiled plans to cuts costs by €3.5bn (£2.5bn) and sell off its Postbank business. This comes days after announcing it will post profit in the first quarter of this year despite litigation costs of €1.5bn ($1.61bn). Deutsche Bank, you will recall, is Germany’s largest lender and the seventh largest in the world. As part of its cutting costs strategy, it will close up to 200 High Street branches by 2017 and leave or reduce its presence in some countries. Postbank will be sold through a stock market listing by 2016.

But investors are not happy with the announcement. Even if the measures would involve savings of €3.5bn euros annually by 2020 and will drive a return on tangible equity of at least 10% during same period hence increasing its profitability, investors showed their displeasure with this latest plan by the Chief Executives of Deutsche Bank. Shares fell by 4.6% to €30.13 hours after the announcement.

Deutsche Bank: Administrative Headquarters.
Credit: Wikimedia Commons
Tough regulations, weak markets and mounting legal bills from misconduct settlements are pressures forcing Deutsche Bank to take moves to axe unprofitable lines in order to boost earnings and make its balance sheets look trim. Days before, Deutsche Bank was fined $2.5bn by U.S and British authorities for obstructing regulators. Twenty-one people also face criminal charges.

Despite the fine, its Q1 revenue reflects a “strong performance across business and a favourable impact of foreign exchange movements,” the bank said in a statement. Revenue at the bank's asset management division was up 30% at €1.4bn, while revenue at the corporate banking arm rose 15% to €4.7bn. The $2.5bn fine by US and UK regulators related to Deutsche's attempts to manipulate the Libor and Euribor rates. At the end of March, the bank had €4.8bn set aside in litigation reserves.

Deutsche Bank’s strength lies in the trading interest-rates and credit products worldwide, for which it was recently ranked second by Bloomberg.

Postbank on the other hand has not proven as profitable as Deutsche Bank would have hoped. By 2016, it would sale off Postbank, shedding off about some 10, 000 employees from its global employee numbers of some 98,000. Stiffer regulatory requirements and expectation that regulators would require increasing capital requirements made it imperative that Postbank be shed.

Investors worry though that 2020 is too far a time to wait; that is five years from now. Analysts believe those set targets are achievable. Deutsche Bank needs restructuring. What was left unsaid was how many jobs will be lost in that exercise or which countries it will exit.

Latest reports have it that the bank is more interested in emerging markets but would not leave off its strategy of being a global lender. Spending for digital technology though is expected to be about €1 billion. Asset and wealth management divisions will expand by 10% a year until 2020 and the number of relationship managers will increase by 15% in key markets.

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