Deutsche Bank’s second-quarter results show the sleight of hand required from new co-Chief Executive John Cryan. Germany’s largest lender grew revenue by a brisk 17 percent in the second quarter to 9.2 billion euros ($10.1 billion). But expenses matched that expansion, and devoured a sizeable 85 percent of the top line. Cryan needs to be creative in order to hack these back, since he is bound by the strategy he agreed on as a member of the board back in April.
Cryan can take comfort in Deutsche’s stronger capital position. Its ratios of equity to both risk-weighted and gross assets, two things regulators watch keenly, improved from the end of March, to 11.4 percent and 3.6 percent respectively. Though regulatory changes will weaken both metrics in coming quarters, Deutsche’s balance sheet looks more respectable relative to euro zone peers than it once did. Revenue in three of Deutsche’s four main businesses also rose year-on-year.
Yet the smart growth belies a shabby approach to costs. Cryan has delayed announcement of where the axe will fall until the end of October, but immediate action is sorely needed. The ratio of expenses to revenue has been below 80 percent just once in the last nine quarters, and not under 70 percent since the first quarter of 2011.
Some of this runaway spending may persist. Deutsche may well have to hire more compliance staff. It’s unlikely 2015 will be the last big year of legal bills for the bank, as former co-CEO Anshu Jain claimed.
Cryan should focus first on cutting Deutsche’s headcount, which has risen in each of the last four quarters. Though investment banking front office employee numbers have dropped, Deutsche has increased the group’s support staff by 5 percent in the last year to above 42,000 – or 43 percent of total employees. That seems like excessive bureaucracy.
Reducing the bank’s geographical footprint to about 55 countries from the 60-plus currently envisaged would also help. True, it might conflict with Deutsche’s desire to remain as an international commercial bank. But the status quo looks untenable. No one expects Cryan to be a magician, but to please shareholders at the same time as delivering on Deutsche’s stated strategy calls for a bit of prestidigitation.