Deutsche Bank seeks to cut €3.5bn costs in strategy overhaul

Deutsche Bank has unveiled a €3.5bn cost-cutting plan and scaled back its target for profitability, as Germany's biggest lender spelt out the details of a new strategy to bolster its financial strength to meet new regulatory requirements.

Deutsche has spent the last few months working on the overhaul, designed to convince shareholders that the bank can adapt to the tougher regulatory environment and market conditions that have prevailed since the financial crisis. However, shares in the bank were down 4.2 per cent in midday trading in Frankfurt and analysts said they had hoped for more detail.

"The market is taking it badly due to a total lack of detail on the call," said Omar Fall, banks' analyst at Jefferies. "No detail on the pace of restructuring costs, investment spend, targets or them guiding for 'significant' risk weighted asset inflation but not telling us how much.

"There was optimism with the results and initial outline but they managed to pull defeat from the jaws of victory, at least temporarily, with a lacklustre call."

One of the main regulatory constraints on big banks in the coming years is likely to be the leverage ratio - which measures a bank's capital against its assets.

Deutsche said on Monday the "single most important" change in its strategy was to increase its ratio from 3.4 per cent to at least 5 per cent, putting it in the same league as US rivals such as Goldman Sachs and well ahead of European requirements.

"Regulation has been tough for the last number of years. We are under no illusions, we think that will remain a key challenge," said Anshu Jain, co-chief executive.

Mr Jain acknowledged that Deutsche would face questions on how it could increase market share while shrinking its balance sheet, but said that "2014 is the year [we proved that] . . . we did shrink our balance share significantly and grow market share at the same time".

In the plan's two cornerstones, Deutsche will rid itself of between €130bn and €150bn of investment banking assets on a net basis, and split off its Postbank retail business, with a view to selling by the end of 2016.

Deutsche will cut €200bn of assets on a gross basis in its investment bank, but allowed itself the flexibility to reinvest €50bn to €70bn in other areas. "[This is] a war chest we will hold back and allocate based on businesses which are giving us significant returns," Mr Jain said.

The bank will also target a return on tangible equity of at least 10 per cent, having previously targeted a return on equity of 12 per cent by the end of 2016. Kinner Lakhani, an analyst at Citi, described the goal as "relatively unambitious".

Deutsche's strength in investment banking has traditionally been its debt trading business, but Mr Jain said the bank would also focus on its equities arm in future. "We've had terrific momentum . . . we intend to continue that and wind up a consistent top five player," he said.

The German lender, which is €3.3bn into an existing €4.5bn cost-saving programme, will also take a knife to its remaining operations. Deutsche expects 60 per cent of the savings to come from efficiency gains, and the remainder from withdrawing from businesses and markets, and cutting its remaining own-brand retail network by around 200 branches.

On a conference call, analysts pushed the bank for more details of when the new savings would be achieved, but Deutsche was only able to say it would be in the next three to five years.

"We have at this point obviously not completed a bottom-up plan," said Stefan Krause, chief financial officer. "We will obviously now as the next step plan in detail with our different divisions." The bank will present more details within 90 days.

Mr Jain said Deutsche would also invest up to €1.5bn in its global transaction and wealth and asset management businesses, and €1bn in boosting its digital capacity.

Deutsche is aiming to increase the size of its balance sheet in its asset and wealth management division by between 5 per cent and 10 per cent a year for the next five years, as well as bolstering the number of relationship managers it has in "key markets" by 15 per cent.

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