How are things over at Germany's finest bank? Deutsche's fourth quarter results suggest they're ok. Sort of.
For the moment, Deutsche's investment bankers are in the calm before the widely anticipated snowmaggedon. The bank is taking stock before unveiling its once-every-three-years strategy review, due in a few months' time. Come the review, a tectonic shift looks likely. Right now? It's all about cost-cutting, compliance tombstones, higher salaries, and apprehension.
Deutsche is in a frantic race to cut costs faster than regulatory spend is rising
Deutsche Bank has been cutting costs and it's been doing so even faster than it intended. In 2013, the bank eliminated €1.3bn of expenses - €300m more than its target.
Unfortunately, and by a perverse coincidence, those[efc_twitter text=" €1.3bn of savings at Deutsche were offset by an identical €1.3bn increase in \"regulatory-related spend.\""]
As a result, Deutsche's co-CEOs used today's call to express their dissatisfaction with the pace of cuts. "In this tough environment cost discipline is all important and we are not satisfied with where we are on costs," declared Jürgen Fitschen. "Our execution and cost reduction programme has not yet delivered the results we were were aiming for," echoed Anshu Jain.
The implication is clear: there are more cost cuts to come.
There's some Pavlovian compliance training
90% of staff at Deusche Bank's corporate banking and securities unit have now been through, "culture and conduct workshops." However, you can't just expect employees to live your values and embark on the compliance 'journey' and arrive transformed. Just as HSBC is issuing certificates to its employees that say, "I am a changed bird", so Deutsche Bank is handing out prizes to its favourite ethical bankers. Anshu Jain said that "living values awards" are being given to employees whose behaviour embodies the banks values. On the flip-side, pay is being cut and promotions deferred for employees whose behaviour raises "red flags."
Room is being made for even more compliance staff
Deutsche Bank now has 700 people in its "divisional control units." And it wants more. The aim is to have 1,000 people in each of these divisional control zones. That's good news for risk, compliance and finance professionals whose pay may yet rise even further. It's not such good news for Deutsche's traders and investment bankers who will to bear the brunt of cost cutting to pay for them.
As fast as employees are cut from the front office, employees are flooding into the back office
Now is not the time to be a front office banker at Deutsche. Over the past year, Deutsche cut 150 people from the front office of its investment bank, at the same time as overall headcount experienced a net increase of 750. At least 900 people were therefore hired into back office and control functions globally in 2014. That's impressive, unless you're a trader.
Salaries at Deutsche's investment bank are considerably higher than they were. However, bonuses are a lot lower
As we first reported last April,[efc_twitter text=" Deutsche has hiked salaries in its investment bank. €300m is being shared between around 1,700 top people"], implying an average increase of €176k per head.
Despite this increase in salaries, average pay per head in Deutsche's corporate banking and securities business rose by a tiny amount (0.4%). We deduce that bonuses must have moved in the opposite direction.
The trepidation is....palpable
Deutsche's fixed income sales and trading business did pretty well in 2014. Revenues increased by 7% year-on-year. As Anshu Jain proudly proclaimed, this was far better than Deutsche's competitors. However, as we noted yesterday, Deutsche's results were flattered by its poor performance in 2013. Although Deusche credited its size with helping to prevent any trading losses from the unexpected removal of the Swiss franc's ceiling against the euro, cuts in fixed income seem inevitable - especially in businesses generating a low return on equity. For the moment, RoE in Deutsche's investment bank is moving in the wrong direction - it declined from 16% in 2013 to 13% last year. More cuts are coming.