FRANKFURT -- Deutsche Bank AG is targeting wasteful spending on IT systems and real estate in a drive to cut costs, Germany's flagship international bank told analysts on Wednesday.
"It is not the most optimistic vision in the world. We are calibrating it to a very challenging midterm environment," co-chief executive Anshu Jain told analysts on Wednesday, adding that the next couple of quarters will remain challenging.
Analysts have expressed doubts over the lender's ability to generate profits in weak financial markets.
Its equity capital markets business is down year-on-year and is unlikely to return to the levels of profitability seen in previous years, and while debt issuance and foreign exchange remain robust areas of business they are not strong enough to stave off cuts.
"We don't believe there will be a cyclical return to core profitability. As a result we've got to go on a diet and cut our cloth accordingly," said Rob Rankin, head of corporate finance.
The bank, which unveiled a raft of painful cuts on Tuesday, said it will focus on paring back hundreds of vendors, legal entities and computer systems, and reduce staff in expensive locations such as London and New York, as it adapts to a tougher investment banking environment.
Joint CEOs Jain and Juergen Fitschen told shareholders on Tuesday they will put the bank on a crash diet that will involve a 4 billion euros ($5 billion) restructuring charge to glean 4.5 billion euros in savings.
Deutsche Bank will sell 40 buildings, consolidate more than 600 legal entities and downsize the 100,000 cost centres which evolved as part of an entrepreneurial culture of chasing growth during more favourable market conditions.
"We have 600 information technology applications within asset and wealth management. It's a fraction of what we have globally," Chief Operating Officer (COO) Henry Ritchotte told analysts on Wednesday.
"Not everybody needs their own COO, not everybody needs their own infrastructure. The process of building up businesses so quickly empowered people to do different things. The processes will now be more top down."
The bank has scrutinised all business areas to see if they add value for clients, meet profit criteria, and whether they eat up capital. Proprietary trading no longer met the criteria and would not be relaunched, Deutsche said.
To reduce expenses, the bank will radically pare down the number of vendors and seek instead to build more strategic relationships with a select few, Ritchotte said.
PAY IN FOCUS
Around 60 percent of staff in London and New York are working in infrastructure rather than client-facing areas, Ritchotte explained, adding that some of this work can be done in Mumbai and other lower cost locations.
Deutsche Bank will cut the 11 layers of management down to 8. Managers currently have an average of 5 people reporting to them, this will be raised to at least 8, the bank said.
Pay will no longer be linked as strongly to job titles, Ritchotte continued.
"We don't want to pay people just because they have a seat. We really need to define exactly what, based on the key performance indicators, this means," Ritchotte said.
Staff were now being asked to emphasise cost compliance as much as market share. In investment banking, resources will tilt towards the areas of revenue growth like Asia.
Variable compensation as a percentage of net revenues has come down to 11 percent, from 22 percent in 2006, the bank said.
The bank had become more rigorous about withdrawing pay using a so-called clawback provision. "For last year we have 35 million euros we have clawed back on behavioural grounds," Stephan Leithner, who is head of human resources, told analysts.
"A change is the red flag reporting system. We have 16 red flags," Leithner said, referring to the different kinds of behaviour it will not tolerate.
As a result of behavioural issues, a total of 11 staff were rejected for promotion to the post of managing director at the investment bank, Deutsche said.
Aside from detailing steps to reduce costs, Deutsche Bank elaborated on how it will reduce the number of risky assets, which would force the bank to hold more capital.
The new non-core segment will house credit portfolios from units Postbank and Sal. Oppenheim as well as assets including a casino in Las Vegas and Maher Terminals.
The German bank will house 125 billion euros ($160.6 billion) worth of assets which the bank would otherwise have to underpin with more capital as stricter banking rules bite in 2013, Chief Financial Officer Stefan Krause told analysts on Wednesday.
"It will include assets and liabilities - assets which will be hit by Basel III rules and will never deliver sufficient returns," Krause said. ($1=0.7785 euros)
(Reporting by Edward Taylor; Editing by Mike Nesbit and Hugh Lawson)
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