Deutsche Bank AG plans to reduce annual costs by a further 3.5 billion euros (US$3.8 billion), cut back its ownership in the Postbank consumer unit and shrink the securities business to revive profitability.
Deutsche Bank aims to achieve a return on tangible equity of at least 10 percent in the medium term, the Frankfurt-based company said in a statement yesterday, scrapping its previous profitability goal. It will reduce the number of countries or local presences by as much as 15 percent by 2020 and close up to 200 branches.
Co-chief executive officers Juergen Fitschen and Anshu Jain are implementing their biggest strategic overhaul of their three-year tenure after failing to meet previous targets. They are under pressure from investors, battered by the worst stock performance among global peers during the their joint leadership, amid concerns about the firm’s rising legal costs and weak capital buffers.
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The bank aims to pay at least half of profit in dividends over the medium term, it said, without elaborating.
The bank plans to reduce leverage by 150 billion euros at the investment bank by 2018 by cutting its businesses of long-dated uncleared derivatives and repos, while optimizing rates, credit and the unit servicing hedge funds.
Deutsche Bank plans to purchase shares in Postbank it does not own before selling a stake in the company to the public and deconsolidate the bank by the end of next year.
“This is a sensible pragmatic plan,” Christopher Wheeler, a London-based analyst at Atlantic Equities LLP, said in an interview with Bloomberg Television. “But it’s still not one that’s going to knock the cover off the ball at this point in time.”
The bank could cut about 3,000 jobs at its retail-banking unit, with more being at risk at the investment bank, Michael Huenseler, who helps oversee about US$16 billion at Assenagon Asset Management SA and holds the lender’s stock, said before yesterday’s announcement.
He said Deutsche Bank probably will not be able to get a price for Postbank above book value.
After paying a record US$2.5 billion fine last week for rigging interest-rate benchmarks, Deutsche Bank on Sunday posted first-quarter profit that beat analyst estimates, as debt and equity trading rose, pushing revenue to a near record.
Net income fell to 544 million euros from 1.1 billion euros in the year-earlier period, hurt by a 1.5 billion euro charge for legal costs. Deutsche Bank’s common equity Tier 1 capital ratio, a key measure of financial strength, fell to 11.1 percent from 11.7 percent at the end of last year. Further headwinds are expected, the bank said.
Deutsche Bank said it would target a common equity ratio of about 11 percent in the medium term, while increasing its leverage ratio to at least 5 percent from 3.4 percent at the end of last month.
The common equity Tier 1 target “still looks a bit light to me,” said Alevizos Alevizakos, an analyst at Keefe Bruyette & Woods in London.
Management was targeting an after-tax return on equity of at least 12 percent by next year, a measure which stood at 3.1 percent in the first quarter. The target had been viewed as not viable, Kian Abouhossein, a London-based analyst at JPMorgan Chase & Co, said before yesterday’s release.
Deutsche Bank plans to retreat from seven to 10 of the 70 countries in which it operates, while investing more than 1.5 billion euros in the transaction banking, asset and wealth management businesses as part of the strategic overhaul.
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