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Passion to Reform

11 September 2012 By George Hay

Deutsche Bank has thrown down the gauntlet. At a strategy day on Sept. 11, new co-chief executives Anshu Jain and Juergen Fitschen had the chance to demonstrate that Deutsche under their watch will be a very different entity than the investment bank-heavy model favoured by their predecessor Josef Ackermann. By and large, they took it.

Jain and Fitschen had two show-stoppers. The first was to commit to a 10 percent core Tier 1 capital ratio under tougher Basel III rules by 2015. As recently as July, Deutsche had not given a deadline for when they would hit this target. Even though the bank will take longer than most peers to achieve it, investors will be relieved they have seen sense.

The second crowd-pleaser entailed Deutsche sticking its neck out on pay. The bank stopped short of a commitment to pay bonuses only if it exceeds its cost of equity. But Jain did say that he could not justify paying the level of bonuses seen in the past with returns being what they are. That’s a big public statement. Meanwhile, top 150 executives will now only receive their deferred bonuses after five years, rather than in staggered tranches over three years. And a new independent board will vet future payouts, including the bonus round for 2012.

Shareholders suffer too in the short term. Conserving earnings instead of paying them out in dividends will help Jain and Fitschen meet their capital target. But profit will depend on how well they can deliver a beefed-up 4.5 billion euro programme to cut costs by 2015 – 50 percent more than was flagged in July. And Deutsche will also have to successfully shrink a big chunk of its new 135 billion euro non-core division. If the euro zone economy flags, or European regulators decide to implement UK-style separation of investment and retail banking, this will become much harder.

But Jain and Fitschen have thought bold at the right time. Recent commitments by the European Central Bank to buy the bonds of stricken euro zone states have made a full-scale euro zone breakup less likely. And making a stand on pay has been made easier by the fact that disgruntled traders now have fewer places to jump ship to. The competitive disadvantage of being a first mover on pay has rarely been smaller.

If Deutsche can pull it off, the reward will be a 12 percent return on equity by 2015. Investors who think they can do it should erase Deutsche shares’ persistent discount to book value.


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