John Cryan is shaking things up at Deutsche Bank. The very English new boss of Germany's biggest bank has already ruffled feathers with his suggestions that bankers are overpaid and bonuses are supplementary to requirement. He's also provided an outline of his strategy for the next five years, which briefly entails tens of thousands of job cuts, a serious cull of unproductive clients, and the addition of 2,000 people across areas like equity capital markets, M&A and 'control functions.'
Yesterday, Cryan elaborated his worldview a little further. Speaking at the Goldman Sachs financial services conference in New York, using typically understated language and judicious pauses, he gave a clearer picture of what's likely to happen to Deutsche's investment bank as his tenure progresses.
1. Deutsche has no intention of competing for domestic business with domestic banks in marginal markets
If you're working for a regional brokerage business of Deutsche Bank and are serving regional clients in a way that pits you against large established incumbents, your days are probably numbered.
Cryan said Deutsche is taking a, "long hard look" at the way it competes with foreign institutions in their domestic markets.
He offered Deutsche's defunct Russian brokerage business as an example: "In Russia, being a domestic broker, serving domestic clients in domestic equities ended up not really being for us."
2. Deutsche has absolutely no intention of pulling out of the US
Much has been written about the seeming precarity of Deutsche's position in the US market. The bank's US operation has incurred repetitive huge fines and is becoming a lot more costly to run under new rules which require the US operation to be capitalized as an independent entity.
Cryan, however, is adamant that Deutsche has no plans whatsoever to give up on Wall Street, which is Deutsche's third biggest office after London and Frankfurt. "To be what we are - a big participant in the capital markets business and one of the leading banks on the European continent, and not to be in the US, would be inconceivable," he said yesterday. If Deutsche isn't in New York, it won't be credible in London and Frankfurt, Cryan said: "If you're not in the biggest fee pool in the world, are you going to make it?"
3. But Deutsche's US investment bankers might find that they're paid less
It's not all happy news for Deutsche's Wall Street investment bankers though. Cryan said the cost of doing business in the US is rising and that as Deutsche's US business is compelled to function as a standalone entity by regulators, it can expect less (or no) cross-subsidization from Deutsche's operations elsewhere in the world.
Under the new set-up, Cryan said Deutsche's US management is being forced to think, "how do we run this business so that's profitable in its own right." It really, "focuses the mind," he added.
4. Deutsche is done with outsourcing and exploiting 'labour cost arbitrage'
Ok, we knew this already, but Cryan reiterated it a little more descriptively: Deutsche won't be outsourcing technology and controls to staff to India and other cheap locations any more.
Deutsche needs to look hard at the way it administers and controls businesses in the investment bank, said Cryan. "In the past, our solution has been to move the process somewhere where it's cheaper," he said, "...this exploits labour costs arbitrage and introduces a lot of process risk."
5. Front office revenue generators are no longer going to be in charge at Deutsche
Most significantly, perhaps, Cryan bemoaned the inflated influence of Deutsche's front office staff.
"There was a very real dominance in the front office in the past," he said. This meant that Deutsche's front office bankers would enter into new client relationships and business areas based upon the revenues they could bring in without paying any attention to the associated costs or the ability of Deutsche's infrastructure team to back them up.
From now on, Cryan said infrastructure staff will have a lot more say at Deutsche Bank. Business areas need to be considered, "holistically", not just in terms of the revenues that can be generated by salespeople, traders, or rainmakers.
6. It's all going to be modular
Cryan's vision is of a Deutsche Bank where processes are broken down into easily handled identical components which are as automated as possible.
"We need to 'modularize' our products, to standardize the components and to computerize the processes that are needed to administer and control them," said Cryan. "It's standard process engineering."
There will be layoffs as a result. "Unfortunately, this means taking people out of the equation and replacing them with computers. This is the only way we will be able to successfully control the cost of the business we write," Cryan added.
7. But it doesn't have to be simple or low risk
Just because Cryan is simplifying process and cutting costs, don't assume he's risk averse. Quite the opposite: Cryan wants Deutsche to earn high margins and this means entering into risky business areas just as long as they don't demand a lot of capital. "We have an ability to enter into complex trades as a source of competitive advantage," he said yesterday. "There's nothing wrong with that [business] if you have the ability to control it efficiently. We don't want to run away from complexity, but to embrace it."