Deutsche Bank could be forced into riskier lending

If the troubled German lender’s latest round of cost cuts fail, it could be forced to take more drastic action to improve returns, according to analysts at credit ratings agency Moody’s

Juergen Fitschen, co-chief executive officer of Deutsche Bank AG, left, and Anshu Jain, co-chief executive officer of Deutsche Bank AG, speak to each other during a news conference in Frankfurt, Germany, on Monday, April. 27, 2015
Deutsche Bank's co-chief executives Jurgen Fitschen and Anshu Jain quit this year after failing to reform the bank and cut costs Credit: Photo: Bloomberg

Deutsche Bank's new chief executive must slash costs quickly or he could be forced to either push into riskier loans or to disappoint investors with low returns indefinitely, analysts have warned.

John Cryan was given the top job in June after co-chief executives Anshu Jain and Jurgen Fitschen quit, having failed to turn the bank around in their three years in the role.

According to Mathias Kuelpmann at credit ratings agency Moody's, the bank needs to cut back its bloated cost-base or risk disappointing investors and falling behind its rivals.

CFO John Cryan of Swiss Bank UBS smiles as he addresses a news conference to present the results for 2010 in Zurich in this February 8, 2011
Ex-UBS banker John Cryan is expected to unveil his plan to shake up Deutsche Bank in the coming months

"A lot of the major banks have major cost-saving initiatives, but if they are not sufficient to basically achieve the returns which have been promised to shareholders, clearly the risk is that banks will take more risky assets or play the yield curve more aggressively," said Mr Kuelpmann.

"This is the last resort for management if they cannot cope on the cost side. If you want to achieve the return on equity, there are limited variables left which the managers can play on, and one of the most obvious ones is cost."

He said that banks such as Deutsche are in a difficult position if their costs take up 60pc of their revenues, and then they are hit with loan loss charges and a cost of risk taking another 15pc, litigation and conduct costs accounting for 5pc and restructuring costs absorbing another 10pc of the bank's income.

"What is left is not great, it allows a bank to deliver a return on equity in the region of 5, 6, 7pc, which is half of the return on equity that most banks have of 11 or 12pc," he said.

"So cost is really key. In the medium- to long-term they should be able to achieve a cost-to-income ratio in the region of 50pc. The best banks are at 40pc, banks like Lloyds and Santander, but they are mostly retail banks where economies of scale are significant."

He was speaking after an analysis from JP Morgan predicted Deutsche Bank will have to cut 10,000 jobs and slash 10,000 external consultants if the lender is to get its costs under control, amounting to roughly 18pc of its overall workforce, as part of a plan to cut costs by €2.5bn (£1.8bn) over the next three years.

But analyst Kian Abouhossein was also sceptical of Deutsche's ability to cut those costs effectively.

"The key is to cut costs – a task which Deutsche Bank has failed to achieve in the past, and hence, on which we believe has little ‘goodwill’ with investors," said the analyst in a research note to investors.