By John Gallagher,
International Business Writer
Leading German bank, Deutsche Bank, has been struggling as of late after facing sanctions last spring totaling to $2.5 billion in fines for rigging interest rates. Banks have been facing stricter regulatory hurdles since the financial crisis that has changed the way that many banks have to do business. CNBC reported that Deutsche Bank is fundamentally changing the way that they do business. They have parted ways with key executives and installed a new CEO, John Cryan. Since taking the reins, Cryan has moved quickly to restructure the bank. Some of the changes include splitting the investment bank and combining its corporate finance and global transaction banking businesses. The Wall Street Journal reports that the bank’s highest profile structural change will be the splitting of the investment bank into two pieces: one focused on mergers and other corporate deals and the other on trading and global markets. High net worth clients will no longer be handled by asset management, but by an independent private wealth management unit. All four of Deutsche Bank’s four business divisions are undergoing some form of restructuring.
So what do all of these changes mean for the bank? The Financial Times reports that the bank is cutting 9,000 jobs of their nearly 100,000 employees, 4,000 of the cuts coming from Germany. They are also cutting 6,000 of the 30,000 external consultants that they hire from areas such as IT. In addition to the job cuts and restructuring, Deutsche Bank is spinning off its Postbank subsidiary, which is a smaller, lower profit lender. This move will lead to 19,000 job cuts.
Deutsche Bank is beginning to clean up their balance sheet by implementing a new targeted capital ratio of 12.5 percent, up from the 11 percent targeted by former CEO Anshu Jain. To do this, they are exiting riskier businesses in their investment banking division, such as high-risk weighted securitized trading and market making for uncleared credit default swaps.
The bank is taking a safer path amid tighter regulations after the financial crisis. They have cleaned up their act significantly since they were found guilty of manipulating LIBOR rates last April. They have increased their capital ratio, which is a key measure of financial strength, and ceased operations in riskier countries including Argentina, Chile, Peru, Mexico, and Uruguay. Deutsche Bank is attempting to lower their risk, cut their costs, and increase their profitability. All in all, the changes are good for the bank which has lagged behind its peers as of late in terms of profitability. Bloomberg reported that they plan to slash their dividend for two years as they cut their costs and improve their capital levels. This will come as a shock to investors as the bank has made dividend payouts every year since 1993. Their shares have lost 15% this year as a result and currently trade at $25.49.
Deutsche Bank is not alone. Barclays is also exploring ways to cut costs and increase their capital. The financial industry as a whole is starting to change the way that they do business.Banks which have traditionally paid their employees with a base salary plus a hefty bonus have cut their bonus pools and increased their salaries. This removes an incentive for risk-taking and potentially unethical actions and allows bankers to focus more on longer-term success. Reuters reported that Deutsche Bank CEO John Cryan admitted that bankers are still paid too much and that he is in favor of reductions to bonuses.
A version of this article appeared in the Tuesday, December 8th print edition.
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