Deutsche to speed restructuring as headwinds build

LONDON, Oct (HKSE: 3366-OL.HK - news) 28 (IFR) - Deutsche Bank (LSE: 0H7D.L - news) boss John Cryan said he was planning to "accelerate and intensify" his restructuring of Germany's flagship bank in the face of ongoing litigation and difficult markets.

The prospect of more big changes at Deutsche next year is in contrast to European rivals Barclays (LSE: BARC.L - news) and BNP Paribas (LSE: 0HB5.L - news) , however, who reported strong results last week as evidence their investment banks are on solid footings after recent restructurings.

Barclays and BNP Paribas both said they had taken market share in the third quarter after seeing fixed-income revenues jump about 40%, easing fears the big US banks are grabbing significant share from their European rivals.

Deutsche reported solid but unspectacular results, with its core bond trading logging a 14% rise in revenues from a year ago. But Chief Executive John Cryan told staff his overhaul plan needed to be stepped up.

The threat of a hefty US fine and possible capital raise have dogged Deutsche since it emerged in mid-September that the US Department of Justice wanted to fine the bank US$14bn to settle an investigation into mis-selling of residential mortgage-backed securities.

Cryan said discussions with the US DoJ were "moving forward", but he declined to estimate when they would be resolved.

"Unfortunately, we must anticipate that the situation will remain tough for some time to come," he wrote in a letter to staff. "Our environment has worsened further in some important areas. As we indicated at the time of our half-year results, we will have to accelerate and intensify our restructuring."

Cryan said concern around the US settlement had affected the market's view of Deutsche Bank as an investment and created uncertainty among clients and about its financial planning and strategy execution.

NEW PLAN

A US fine of about US$5bn would probably require Deutsche to raise at least that much from investors, analysts estimate.

"Once litigation issues are resolved, we'd expect Deutsche Bank to announce a new strategic plan, involving further asset reduction, as well as potentially a capital increase," said Andrew Coombs, an analyst at Citigroup (NYSE: C - news) .

Cryan is in the process of cutting 9,000 jobs and slashing assets through his Strategy 2020 turnaround plan and he warned staff in last week's letter he would be "more ambitious in headcount reduction".

That includes a hiring freeze across the bank. Annual churn is estimated at between 7,000 and 10,000, so that could account for much of the headcount reduction, as it has at rival Barclays (Swiss: BARC.SW - news) in the past year.

Credit Suisse (LSE: 0QP5.L - news) is under pressure to show progress in its restructuring when it reports this week, after tentative signs the plan set out by new CEO Tidjane Thiam is gaining traction.

Swiss rival UBS (LSE: 0QNR.L - news) posted a 44% plunge in underlying third-quarter profits at its investment bank. Analysts said it suffered from its shift away from fixed income at a time of strong debt market revenues, although the bank was also weak in equities and underwriting, which could raise concern its turnaround had stalled.

STRATEGIC TWEAKS

US banks, Barclays and BNP Paribas all said they had been taking market share, and bankers and analysts said that was likely to have been at the expense of Deutsche and Credit Suisse.

"I think our market share is growing at a time that some of our competitors are contracting or withdrawing from segments," Philippe Bordenave, chief operating officer at BNP Paribas, told IFR.

"Some other banks clearly are retrenching and are leaving some market share on the table, so there is some room for market share gain for the others."

Barclays began restructuring its investment bank in May 2014 and Staley said he liked its footprint and size after further cuts made in January, when it pulled back from Russia, Brazil and seven countries in Asia.

"We think we have the right amount of risk capital allocated to the investment bank, so we like our position today and we hope to continue to move that business forward," Staley said.

Banks further ahead in their restructuring are likely to try to drive home their advantage by pushing ahead with cost savings and new technology to improve efficiency, bankers said.

BNP Paribas unveiled changes to its CIB strategy in February, which involved job cuts, reducing 20bn of risk-weighted assets and trimming some businesses, countries and client portfolios. It aims to save 1bn in annual costs by 2019 and focus on business that generates fees at a low cost of capital.

"The business is changing, especially with the arrival of new digital technologies, and we are adapting. It's well under way and I think it's well accepted and is evolving. It's more a change in the way we do things, rather than a change in products and geography," Bordenave said. (This story will appear in the October 29 issue of IFR Magazine; Reporting by Steve Slater)