| FRANKFURT, June 2
FRANKFURT, June 2 Deutsche Bank AG's
pitch to investors on the merits of its planned 8 billion euros
($11 billion) share issue comes with an ambitious cost-savings
vow, vital if it is to boost key performance measures in line
Deutsche portrays itself as Europe's last man standing in
global investment banking after rivals such as Barclays Plc
and UBS AG scaled back their operations in
the lucrative but risky field, arguing its share issue will
ensure it is positioned to vacuum up business they abandoned
once bond markets recover.
But those familiar with detailed plans at the investment
bank - Deutsche's biggest division by far - say management is
betting more on cost cuts than a market boom to help it meet
rivals' key performance ratios, at least in the short to medium
term, given that a boom remains out of sight.
"It's all about costs," said one senior official close to
Deutsche's plans for investment banking. "On the revenue side
... we're not counting on any kind of uptick ... But that's an
extra bonus for when the world normalises."
Slides that Deutsche executives have showed to investors
include a map plotting the path to efficiency, a target of 65
percent in the cost-to-income ratio by 2015, an improvement on
77 percent at the end of March. The target is adjusted, meaning
it excludes costs for nasty stuff like litigation and
Not highlighted by the bank, or widely seized on by
investors who will pay for the share issue, the slide depicts
roughly 1 billion euros in new cuts described only as
"management action", which come on top of the 2.3 billion euros
in cuts already promised.
Those are likely to hit things like infrastructure and
processes more than people, said the person close to the
investment bank plans, without being any more specific.
A spokesman for the bank declined to elaborate on the nature
of the cuts.
The current management team's track record in delivering
cost cuts promised in 2012 so far has been good. Co-Chief
Executives Anshu Jain and Juergen Fitschen have led cuts of 2.3
billion euros since 2012.
But the size of the remaining challenge - to eliminate
roughly 3.3 billion euros in additional cuts by end-2015 - has
led analysts at Morgan Stanley, for example, to predict Deutsche
will hit a post-tax return on equity (RoE) of only 8 percent by
2016, far below the 12 percent sought by the bank.
Deutsche delivered an RoE after tax of 7.9 percent in the
first quarter, close to Barclays at 7.1 and Credit Suisse
at 8 percent but far below the 10 percent recorded by
U.S. rival JPMorgan.
Even if it does deliver its cost-saving targets, the bank
still faces huge new expenses that are both unpredictable and
Some of the new expenses, which were only revealed with the
share issue plans, include roughly 1.2 billion euros in new
money for "additional regulatory and control costs" meant to
address tougher sector-wide rules, according to Reuters
calculations based on the plans.
Perhaps the biggest expense will be the one that is hardest
to quantify - litigation - which remains, as it has for the past
two years, the greatest threat to a turnaround.
Fines and settlements have cost the bank over 5 billion
euros in the past two years and some analysts expect up to 3
billion more in the next two years.
The unpredictability has led the bank to caution investors
that all of its targets are under threat from unexpectedly heavy
fines and that honouring previous promises to clean the slate in
2014 is out of the bank's hands.
"It's simply not a serious answer to say we'll be done (with
litigation) by the fourth quarter," said a second executive
close to Deutsche Bank strategy and thinking. "Because we really
($1 = 0.7328 Euros)
(Editing by David Holmes)