John Cryan's most telling comments on Deutsche's 2020 strategy
Today is Deutsche Bank's results day. It is also the day of the bank's 2020 strategy presentation.
The bad news is that new CEO John Cryan says the bank won't be out of the woods for several years. Neither 2016 nor 2017 are likely to be good years for the bank, said Cryan today - both are likely to be blighted by restructuring and strategy changes. 2018 might be neutral, but in 2019 the bank will be hit by changes to the way risk weighted assets are measured under Basel IV. Unless Deutsche prepares for these changes, Cryan says the markets business won't be viable in future.
Most telling, however, was Cryan's response to an analyst who asked why he's not making bigger cuts to the investment bank. "My assumption was that as a new broom, you would have shrunk the investment bank more," said the analyst, questioning why Cryan isn't making deeper cuts to prime broking, rates and credit, all of which offer minimal returns for the capital invested. "We have to be in business, we have to do something," snapped the normally mild-mannered Cryan in response. Later he said it's foolish to cut pay (and jobs) too harshly because it can be very "difficult to rebuild things." - Once talent is lost or a business dismantled, it's hard to get it back again.
This isn't to say that Deutsche isn't cutting jobs. In total, it plans to cut 35,000 posts. 20,000 will go as dumps 'assets' (think Postbank, which employs 15,000 people). Another 9,000 will go as it pulls back from 10 countries (Argentina, Chile, Mexico, Peru, Uruguay, Denmark, Finland, Norway, Malta, and New Zealand) and focuses on core clients and businesses. Another 6,000 will go as it gets rid of contractors.
However, Deutsche isn't cutting as many jobs as expected. Deutsche's contractor cuts are only 20% of the total according to CFO Martin Schenck. The Postbank sale and related job cuts have been anticipated for a while. The 9,000 remaining job cuts amount to just 11% of the remaining 80,000 staff and are net. - Deutsche also plans to hire 2,000 people.
Overall, Cryan's analysis of the problems in the investment bank goes something like this: it's been spread too thinly, it's outsourced too much of its back office in search of short term cost savings, it has too many "cumbersome, weak and manual processes," and it's become over-reliant on acting as a principal for long-dated trades (particularly long-dated complex rates trades) and needs to stop.
This is what else you need to know.
1. Most of Deutsche's investment banking clients generate negligible revenues. If you work with them, you're out
Deutsche's client base is a classic case of the 80:20 rule, except in this case it's more like 80:30. As the chart below shows, 30% of the clients generate 80% of the revenues.
Deutsche plans to cut its client base by 50%. If you work with the marginal so-called 'tail clients,' your job doesn't look too secure.
Source: Deutsche Bank
2. Only 700 corporate and investment banking jobs over three years will be lost from exiting Argentina, Chile, Mexico, Peru, Uruguay, Denmark, Finland, Norway, Malta, and New Zealand
If you work in any of the countries Deutsche is getting out of, it's not good news, but in the grand scheme of things the resulting job cuts are minimal. The bank says that only 700 jobs will disappear as a result of pulling back from the 10 countries above. Trading and back office jobs in these countries will disappear as Deutsche refocuses activities in 'regional hubs.'
3. Job losses will also come from exiting undesirable capital-heavy fixed income trading businesses
Deutsche doesn't specify exactly how many jobs will go as it exits entire business lines, but we assume that several hundred more will disappear as it pulls back from 'market making uncleared credit default swaps.', agency residential mortgage backed trading, its legacy rates business, and 'high risk' securitized trading. During today's call, Cryan said the bank is "substantially disengaging from flow credit" and getting out of long dated rates.
The bank also intends to 'streamline' rates, securitisation and emerging market debt hubbing.
4. The real pain will come in the technology function
The real crunch at Deutsche, however, is likely to hit the bank's technologists. As the chart below shows, Deutsche intends to dramatically reduce its number of operating systems and do away with its 'end of life hardware/software' (ie. its incredibly outdated hardware and software systems). Anyone working on old systems or old software will be surplus to requirement. However, Deutsche is also going to need a lot of change and project management specialists to manage the transition, and will need cloud and virtualisation specialists to increase virtualisation to 95% and 'private cloud adoption to 80%.'
Cryan is particularly against Deutsche's model of offshoring to India and elsewhere. This simply achieves, "near term cost savings," he said today.
.'Source: Deutsche Bank
5. But Deutsche will also hire around 2,000 people. These include additions to equity capital markets, M&A, credit solutions, prime brokerage and control functions
It's not all about cutting. Deutsche also aspires to 'selectively reinvest' in credit solutions and prime brokerage. It says that it will be making, ' focused efforts to expand market share in Advisory and Equity Capital Markets.'
In total, Deutsche expects to hire up to 2,000 people across the bank between now and 2018.
6. In the meantime, pay per head in the investment bank is falling - but not by much...
In the first nine months of this year, Deutsche allocated an average of €107k in pay per head to each of the employees in its investment bank. This was done from €113k last year - a mere 3% reduction.
7. And Deutsche has been adding staff in support roles
Between September 2014 and September 2015, Deutsche hired 2,500 people for non-front office jobs in the corporate and investment bank - an increase of 15%. Over the same period, front office jobs were cut by 4%.
8. But something's up with Deutsche's equities sales and trading business
Finally, it's worth noting that Deutsche's equities business didn't have a very healthy third quarter. As UBS analysts point out, it seriously under-performed the market. Revenues fell 19% year-on-year, while most other banks saw double digit increases. That doesn't augur well for Deutsche's plans to build its equity capital markets business.
9. Most of all Cryan aims to boost Deutsche's share price - because this will make all the bankers with deferred bonuses happy
Bonuses will remain part of compensation at Deutsche Bank, said Cryan. But rather than paying big bonuses in one year, he said the best method of improving morale at the bank will be to increase its share price. - This way bankers with twenty years' service and a lot of Deutsche stock will have something to celebrate. It's unfortunate, therefore, that Deutsche's share price fell after the new strategy was announced today.