Deutsche Bank, No Longer Funny

The signs of trouble are evident in Deutsche Bank American headquarters as there are more empty seats and brown boxes can be seen in the offices of the senior executives. More computers are off indicating that employees have already left the company while those remains are also out actively hunting for jobs in other banks. Everybody knows, but no one bothers to question the employees looking for new jobs. It seems as though everyone is expecting another storm of bad news from the head office and these employees are just preparing for the worst.

According to Bloomberg, a person knowledgeable of the current state of the bank says that CEO Christian Sewing may announce a major restructuring plan to save the company by slashing off more than 20,000 employees worldwide.

For over a year now, the New York executives are always in doubt whether the US Operations will either be sold or totally be cut. And as the US office continually hears rumors and news, an employee will always have doubt if they will still have jobs in a year.

And now, finally, their fears are coming true.

With the record of more than 38,000 employees for Deutshe Bank’s CIB (Corporate Investment Bank), 17,000 of them at the frontline in the first quarter, the pride of Germany in the banking business is now looking forward to cutting half of the number of employees or, it could cut-off around 643 of its senior employees who are earning over a €1M

Souce: https://www.db.com/ir/en/download/Deutsche_Bank_Compensation_Report_2018.pdf

While there are more than 38,000 employees for Deutsche Bank, only 2% of these employees hold 30% of its overall compensation. Short to say that a big chunk of the company’s money goes into the pockets of overpaid bureaucrats.

So, instead of cutting its manpower to half, Chairman Sewing could cut dump most of its high paying employees and save the company 20% to 30% in expenses. And while there’s a small possibility that he will do that, according to Bloomberg, Peter Selman, global head of equities, is on his way out the door and that Zia Huque, the head of Deutsche’s US securities team, and Tom Patrick, head of the Americas, will likely soon follow.

According to reports, the restructuring cost of the bank by shrinking its investment banking division may cost as much €5bn and will result in a net loss this year. The current forecast by the analysts is that the bank can generate less than  €1bn this year, but the company has been unprofitable for three of the last four years.

Mr. Sewing is looking forward to diverting to more stable businesses such as retail banking and asset management instead of the volatile investment banking and trading. This plan will cut the bank’s annual cost by €4bn by 2022 but the bank has not yet planned on raising more capital for the restructure as the existing investors may not welcome the idea of raising fresh equities.

This decision not to raise capital, however, will make the bank’s common equity ratio to fall 1 point from its current minimum target of 13 13 percent of its risk-weighted assets. Their plan according to the Financial Times is to announce a new minimum target of 12.5% and the European Central Bank and the other regulators are still comfortable with the figures because this new target is still a percent higher than the regulatory minimum.

Highly affected in this plan is the Deutsche’s Wall Street operations, as Mr. Sewing plans to slim down its rates division while shutting down the unprofitable equities trading business. With all these, aside from Peter Selman, Zia Huque, and Tom Patrick, Garth Ritchie, head of the investment bank is also expected to leave. Moreover, as the head of the bank’s regulatory division, Sylvie Matherat, who has been under fire for compliance lapses may also be likely to depart from the company.

The bank also plans to set-up a “bad bank” to house more than €50bn toxic assets, this plan will be finalized on July 7, 2019, three days from now. These assets have been a problem to the company affecting the bank’s capital position since the stricter rules have been introduced in 2007-09 during the financial crisis.

This unit will hold long-dated derivatives where they plan on either gradually closing it or selling it and while it may be hard to find banks who will be interested in taking in those assets, private equity buyers might take it at a big discount.