By Thomas Atkins
FRANKFURT (Reuters) - Deutsche Bank AG's pitch to investors on the merits of its planned 8 billion euros ($11 billion) share issue comes with an ambitious cost-savings vow, vital if it is to boost key performance measures in line with rivals.
Deutsche portrays itself as Europe’s last man standing in global investment banking after rivals such as Barclays Plc and UBS AG scaled back their operations in the lucrative but risky field, arguing its share issue will ensure it is positioned to vacuum up business they abandoned once bond markets recover.
But those familiar with detailed plans at the investment bank – Deutsche’s biggest division by far - say management is betting more on cost cuts than a market boom to help it meet rivals' key performance ratios, at least in the short to medium term, given that a boom remains out of sight.
“It’s all about costs,” said one senior official close to Deutsche’s plans for investment banking. “On the revenue side ... we’re not counting on any kind of uptick ... But that’s an extra bonus for when the world normalizes.”
Slides that Deutsche executives have showed to investors include a map plotting the path to efficiency, a target of 65 percent in the cost-to-income ratio by 2015, an improvement on 77 percent at the end of March. The target is adjusted, meaning it excludes costs for nasty stuff like litigation and restructuring costs.
Not highlighted by the bank, or widely seized on by investors who will pay for the share issue, the slide depicts roughly 1 billion euros in new cuts described only as “management action”, which come on top of the 2.3 billion euros in cuts already promised.
Those are likely to hit things like infrastructure and processes more than people, said the person close to the investment bank plans, without being any more specific.
A spokesman for the bank declined to elaborate on the nature of the cuts.
The current management team’s track record in delivering cost cuts promised in 2012 so far has been good. Co-Chief Executives Anshu Jain and Juergen Fitschen have led cuts of 2.3 billion euros since 2012.
But the size of the remaining challenge – to eliminate roughly 3.3 billion euros in additional cuts by end-2015 - has led analysts at Morgan Stanley, for example, to predict Deutsche will hit a post-tax return on equity (RoE) of only 8 percent by 2016, far below the 12 percent sought by the bank.
Deutsche delivered an RoE after tax of 7.9 percent in the first quarter, close to Barclays at 7.1 and Credit Suisse at 8 percent but far below the 10 percent recorded by U.S. rival JPMorgan.
Even if it does deliver its cost-saving targets, the bank still faces huge new expenses that are both unpredictable and unquantifiable.
Some of the new expenses, which were only revealed with the share issue plans, include roughly 1.2 billion euros in new money for “additional regulatory and control costs” meant to address tougher sector-wide rules, according to Reuters calculations based on the plans.
Perhaps the biggest expense will be the one that is hardest to quantify - litigation - which remains, as it has for the past two years, the greatest threat to a turnaround.
Fines and settlements have cost the bank over 5 billion euros in the past two years and some analysts expect up to 3 billion more in the next two years.
The unpredictability has led the bank to caution investors that all of its targets are under threat from unexpectedly heavy fines and that honoring previous promises to clean the slate in 2014 is out of the bank’s hands.
“It’s simply not a serious answer to say we’ll be done (with litigation) by the fourth quarter," said a second executive close to Deutsche Bank strategy and thinking. "Because we really don’t know.”
(Editing by David Holmes)