Earlier this Tuesday, the recently appointed Co-CEOs of Deutsche Bank (NYSE:DB) – Jürgen Fitschen and Anshu Jain – announced sweeping organization-wide changes aimed at cutting costs, improving profitability and ensuring a sustainable business model.  Most notably, the plan – “Strategy 2015+” – sets specific, measurable targets for revenues, expenses and income figures for the bank’s various business divisions. The well-rounded plan clearly attempts to address the concerns of shareholders by focusing most on returns and long-term business goals. In fact, we believe that some of the steps proposed to improve employee compensation would find ready takers among competitors like JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C) who have been jostling for ways to better match compensation with the bank’s overall, long-term performance. The market reacted positively to the announcement, with Deutsche Bank’s shares rising 6% over trading on Tuesday.
We are currently in the process of revisiting our $41 price estimate for Deutsche Bank’s stock, to factor in the impact of Strategy 2015+ on our analysis.
Changes Targeting Bank-wide Performance Metrics
- Return on Equity Target: In what can be called the ‘ultimate goal’ of the proposed plan, Deutsche Bank wants to raise its post-tax return on equity figure to at least 12% by the end of 2015. The bank managed to generate returns of just over 8% in 2011.
- Capital Ratio Target: In view of the increasing focus on the sufficient capitalization of banks in order to meet stringent Basel III norms, and to help mitigate the growing uncertainty about the banking sector as a whole in the Eurozone, Deutsche bank has also laid out its capital ratio plans as a part of Strategy 2015+. The bank aims to reach a Basel III equivalent Core Tier 1 capital ratio of 8% by the end of next March, and finally 12% by March 31st, 2015.
- Cost Reduction Target: The bank intends to improve cost-income ratio to less than 65% by 2015. This ratio was more than 75% for 2011. The target is achievable given the proposed road-map of booking €4.5 billion ($5.8 billion) in annual savings through a reduction in “duplication and complexity.” A majority of these savings are expected from shifting to low-cost locations, switching to an integrated technology platform, consolidating back-office activities and centralizing procurement. The bank will also shave off more jobs than the 1,900 it announced earlier this year. Other savings are also expected from selling off as many as 40 properties. The proposed cost-reduction plan would itself come at a one-time cost of about €4 billion ($5.1 billion) spread over the next three years.
A Well Thought-Through Compensation Rejig
In our opinion, the most notable and far-reaching change proposed by Deutsche Bank is the complete revamp of its compensation policy – some of the proposed steps being applicable across the entire banking sector. Major banks across the globe have drawn flak in recent years for their seemingly inappropriate compensation policies which do not reflect poor performance by the bank as a whole over a given period. Moreover, serious concerns have been raised about prevailing compensation policies that breed risky behavior among bank employees who focus on short-term gains rather than long-term returns – something witnessed in the recent multi-billion dollar trading losses by UBS and JPMorgan.
Deutsche Bank is forcing its higher executives to think long-term by deferring their bonuses by five years instead of the current three-year period. These employees will also see the entire bonus amount at the end of the five year period, rather than in parts over three years as they now enjoy. And to reiterate the importance of Deutsche Bank’s results as a whole, the bonuses could also be cancelled or even taken back if the performance for a period is hit by serious losses or misconduct. 
But wouldn’t this affect Deutsche Bank’s competitiveness in the job market? We don’t think it will too much, as the changes are largely targeted towards bonuses handed out by the bank’s investment banking division. Unlike the investment bank, other divisions are less volatile when it comes to revenues as proven by the bank’s track-record. Also, the bank adds that there will be no compensation caps imposed as such. So Deutsche Bank performs well, all employees continue to see fat, no-limit bonuses.
Division-Specific Goals Outlined
- Private & Business Clients division: This division includes Deutsche Bank’s retail business and seeks to maximize income by releasing value from the ongoing Postbank integration. The division intends to increase lending (see chart above) to boost pre-tax income from €2 billion ($2.6 billion) in 2011 to approximately €3 billion ($3.9 billion) by 2015.
- Corporate Banking & Securities division: The investment banking arm seeks to increase its footprint in the U.S. and Asia-Pacific by leveraging its leadership position in Europe.
- Asset & Wealth Management division: This newly separated business division targets a trillion euros in assets under management (see chart below) from its current size of €900 billion ($1.2 trillion). This is expected to help it double its pre-tax income over the next three years.
- Global Transaction Banking division: The division which recently piloted cross-border transactions in China looks to expand globally to earn at least €2.4 billion ($3.1 billion) in pre-tax earnings by 2015 from the €1 billion ($1.3 billion) in 2011.
- Non-Core Operations unit: Deutsche Bank will move as much as €135 billion ($174 billion) in assets largely from its investment banking unit into a separate non-core division. These assets will be disposed off over time, with a target of an at least 33% reduction by next March.
- Deutsche Bank announces strategic and financial aspirations for 2015 and beyond, Deutsche Bank Press Releases, Sept 11 2012 [↩]
- Deutsche Bank to cut costs, change pay practices, Bloomberg Businessweek, Sept 11 2012 [↩]