In June 2019, Deutsche Bank announced that they will be cutting 18,000 jobs in an effort to restructure the corporation. Corporate restructuring can include a large variety of changes, all of which are designed to make the company more profitable. Changes can include ownership structure, debt and financing structures, and updating management systems. Of course, changes can also be made to the business lines leading to an increase or decrease in jobs.
Quick Summary Points
Deutsche Bank is eliminating the equities sales and trading business lines and laying off 18,000 employees.
The bank has not been able to recover from the financial crisis and has been fined numerous times for misconduct.
Instead of focusing on sales and trading, which can create volatile earnings, they are shifting focus to corporate money management.
History of Deutsche Bank
Deutsche is a German banking institution founded in 1870. Unfortunately, throughout the years, they have been involved with several scandals and poor business decisions. For example, the bank took part in the subprime mortgage crisis. Even when the bank sensed that the market was turning south, they continued to sell mortgage-based investments. To make things worse, Deutsche also took bets against the products they were selling. These actions cost the bank $7.2 billion in fines, which was adjusted from $14 billion after a settlement with the US Department of Justice.
Between 2015 to 2018, Deutsche was also fined for other misdemeanors. They include rigging the Libor interest rate, doing business with US-sanctioned countries, and failure to prevent money laundering. In the money laundering case, Deutsche Bank was fined $630 million for not preventing $10 billion of Russian money laundering.
Decisions that were made
In terms of business decisions, since 1989, Deutsche bank had plans to become a global bank. They acquired banks in other countries and obtained a greater global presence. By consolidating their US operations into one, they had plans to take on Wall Street banks such as Goldman Sachs. However, after the financial crisis, the sluggish European economy, and new regulations, such plans fell apart. In 2019, plans to merge with another German bank, Commerzbank, fell through. If the merger was successful, it would have created the eurozone‘s second-largest bank. These plans were made as both banks were struggling, with Deutsche trying to recover after the financial crisis.
Why cut 18,000 jobs?
Deutsche made the decision that their business operations are spread too thin or over-diversified. One of the executives stated that the bank had tried to compete in too many business lines. To ratify this situation, they have decided to close the equities sales and trading business and decrease the rates division. By removing this business line from the banks, they are also letting go of 18,000 employees. Originally, executives were reluctant to cut this business line. Although it is high risk, issuing and trading derivatives can be very profitable if done properly. However, as Deutsche Bank becomes less profitable, the bank seeks more reliable business. Now the bank will shift focus to corporate money management.
The short term cost of Deutsche Bank’s restructuring process is $8.29 billion with a majority occurring in 2019. The cost mostly consists of severance packages for the employees that were let go. The estimated benefit is $6.7 billion in cost savings by 2022. Cost savings originate from lower salary expenses and bonuses paid each year. Other banks have called this plan ambitious and the actions radical.
Christian Sewing became the chief executive in 2018. Sewing had already cut over 3,000 jobs and closed hundreds of branches. Sewing, along with the board, made the decision to cut the equities sales and trading division as it lacks revenue reliability. As mentioned above, cost savings are also expected from lower payment of bonuses. The previous chief executive was criticized for the continuous payment of high bonuses for investment bankers.
Not all of the executives agree with or was unscathed by the decision. For example, Frank Strauss, the head of retail business, has left the bank, as he did not agree with the restructuring plan. Garth Ritchie, the chief of investment banking, will be leaving the bank as well.
What does it mean for investors?
The stock for Deutsche Bank has fallen by 95% since 2007 due to the difficulties the bank has faced. For existing investors, the bank has stated that they will not raise additional capital to fund the restructuring plan. Many investors or potential investors are waiting to see how the plan will be executed, as well as the results it will deliver. While costs will be reduced, it is to be seen whether the revenue will be negatively impacted.
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