After 100 days as co-chairmen of Deutsche Bank, Anshu Jain and Jürgen Fitschen last month delivered to investors their plan to guide the bank through the next three years, simultaneously boosting capitalization and returns in market conditions likely to be characterized by high macro and regulatory uncertainty and weak revenue growth.
It’s an ambitious programme that offers some insights into the likely future for investment banking, Deutsche’s signature global business and the only one for which it is well known outside Germany and the eurozone.
But it is not good news for those who work in the business.
The story in investment banking is all about cost-cutting, shedding staff and paying retained staff less. Fitschen and Jain even appealed to shareholders to put pressure on other banks to follow what they characterize as an industry-leading move by Deutsche, lest they not be able to pursue it and at the same time sustain the bank’s leading position in many investment banking businesses.
Jain asked: "What if we are the only ones who move to a five-year cliff vesting bonus programme and lower our payout ratios; can we go it alone? Not if every other firm continues with its current payout ratios. But every sign I see is that we will not be the only ones." He told shareholders: "We are taking the step you asked us to take, please go to other firms and ask them to do the same."
Jain pointed out that it would have been easier to present a 10-year vision for the bank, painting it as a likely beneficiary of the survivors’ premium, a consolidator in a shrinking banking system with potential for higher market share and revenue growth. This might indeed all play out eventually. Long renowned as a top debt markets firm, and fixed-income and currency trader, Deutsche also ranks in the top three globally in equity capital markets for the first nine months of 2012, according to Dealogic, and ranks number four among global M&A advisers.
But before Deutsche shareholders enjoy tomorrow’s jam, they have to endure an uncomfortable present, stuck in the toaster to be scorched by shrinking volumes from risk-averse customers on the one hand and compressed margins on the other, as bank funding costs remain high and policymakers keep damaged competitors propped up, delaying much-needed rationalization of the European banking system.
Jain revealed that the bank’s senior management will now get annual bonuses awarded in Deutsche stock that will be deferred for five years. Previously, bonus awards vested over three years with payouts equally spread in each year. Jain, knowing how reviled bankers are for their pay, challenged his audience of investors and analysts to name another industry that now places such restrictions on senior management pay.
|Co-chairmen of Deutsche Bank, Anshu Jain and Jürgen Fitschen|
Jain also says: "I don’t agree with some of those regulators who say that if you over-capitalize the investment banks, investors will be happy with a high-single-digit return on equity. Why would you be? I wouldn’t advise anyone considering investing in a pure-play investment bank to accept a 7% return on equity."
In 2011, Deutsche delivered a post-tax group return on equity of 8%. Jain and Fitschen now promise to boost this to 12% by 2015, while also building the bank’s fully loaded Basle III core tier 1 equity ratio from 6% in 2011 – ahead of regulatory requirements, but well behind many of its peers – to 10%. They say the bank has no plans to go to the equity capital markets to achieve this with a rights issue, but will rather retain earnings and manage down risk-weighted assets in ways that will release more capital than remove earnings.
Its way to boost return on that remaining capital is not by chasing revenue or market share, but rather by cutting the group’s cost-income ratio from 78% in 2011 to 65% by 2015.
Based on numbers up to the end of June 2012, Deutsche’s annualized costs are running at €27 billion a year and it now aims to cut this to €22.5 billion by 2015, paying €4 billion in one-off costs to achieve this €4.5 billion annual saving.
It remains to be seen whether the bank’s leaders can deliver this and contain any consequent loss of revenue.