It is quite interesting that two pieces of likely interconnected news hit today about everyone’s favorite German bank. First, Reuters reported rumors that C-suite officials from Deutsche Bank alerted their HR to perhaps expect double the job cuts from what was previously announced. Last October, the bank claimed that it would need to shed about 9,000 employees. Apparently, that might not be nearly enough:
Deutsche Bank’s finance chief told staff representatives last month that job cuts at the bank could be double that planned, a step that could remove 10,000 further employees, a person with direct knowledge of the matter told Reuters.
Although no such decision has yet been taken, Marcus Schenck’s remarks, at an internal meeting, signal the lender is considering further significant cost cuts, as it faces a multi-billion-euro fine and a crisis of confidence among investors.
It is that last phrase that is important far more than the fine. The prospect of 10k in headcount reduction on top of the 9k from last year would mean DB is considering shrinking by an enormous one-fifth – roughly the same proportions as other banks have announced recently. Thus, this isn’t just about Deutsche, and at Deutsche it isn’t necessarily tied to the US DOJ.
Also this morning, the Wall Street Journal reported on possible concerns from DB’s top shareholder being directly expressed to the bank’s management maybe for the first time. It is, obviously, unclear whether these two stories are related, but you do have to wonder.
Deutsche Bank AG’s biggest shareholders, investment vehicles controlled by the Qatari royal family, have recently expressed concern about the threat of legal fines against the lender and whether it is adequately focused on its long-term strategy, according to people familiar with the matter.
It is the “long-term strategy” being hugely shortened that I believe is at issue here, not prospects of a potential even sizable DOJ fine. Even the Journal gets around to it:
Still, the disclosure about the Justice Department’s initial proposal has crystallized deeper concerns about the German bank. Investors and analysts have fretted over its ability to weather big legal fines considering its already-thin capital cushion, and bolster profits in its shrinking investment-bank and trading operations. [emphasis added]
They don’t really get around to speculating about what those “deeper concerns” are apart from general and generic descriptions. My own view, as expressed last week, is that this is far more than long range doubts about profitability; it is the immediate problem of balance sheet math boiling to the surface in “unexpected” ways.
As I have been writing over the past year and a half or so, those concerns have already been raised – nobody noticed because they were too invested in trying to ignore how QE wasn’t what they all thought it was. When math starts to go bad, banks often face only stark and confusing (to the outside) decisions: let RWA’s rise and be forced to raise more capital at a time when questions about banks “having” to raise capital may make it more difficult and perhaps dangerous (Deutsche), or try to “earn” your way out by drastically shrinking operations and cutting back marginal resources before the auditors and regulators start questioning why your math doesn’t conform. [emphasis added]
Given these latest pieces of information, though speculative, together they do seem to describe both what may be going on in Frankfurt as well as the sudden possible urgency for “it.”