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Deutsche Bank Needs Deeper Cost Cuts to Turn Around

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Cost-cutting measures

Deutsche Bank’s (DB) cost-cutting measures had some positive impact on the company in 2Q16, but the bank still has a long way to go. During the second quarter, operating expenses fell by 14% to non-interest expenses of 6.7 billion euros, or about $7.4 billion, which is 14% lower YoY (year-over-year).

Lower litigation cost primarily drove this decline. Legal costs, which have impacted Deutsche Bank’s performance for the past few quarters, declined by 90% in 2Q16 to 120 million euros, or nearly $133 million. However, costs are expected to remain significant for the bank throughout the second half of the year, because the bank expects to bear restructuring and severance charges of 0.3 billion–0.5 billion euros, or about $0.33 billion–$0.55 billion. To add to the trouble, analysts at Morgan Stanley (MS) have forecast litigation charges of nearly 3.9 billion euros, or just over $4.3 billion, for 2016 and 2017.

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However, the decline in expenses was not enough to offset the effect of weakness in revenues. The cost-to-income ratio, a measure of the bank’s efficiency, remained considerably high at 91%. Deutsche Bank has set a cost-to-income ratio target of 70% by 2018 and 65% by 2020. This ratio shows how revenues fuel a bank’s operating expenses. A lower percentage is better because it means lower expenses compared to revenues. The number of employees stood at 101,307 at the end of June. This is down by 138 full-time equivalents from the end of March but still higher than in 2015.

CEO John Cryan said during the company’s earnings call that the bank is making progress in a multiyear turnaround. But Cryan warned that if weak market conditions persist, the bank “will need to be yet more ambitious in the timing and intensity of our restructuring.” This indicates that the bank will need to cut more jobs and take more severe steps to cut costs. The weak economic environment is unlikely to improve soon, especially in Europe, (EUFN) where low interest rates are killing banks like Credit Suisse (CS), UBS, and Barclays (BCS).

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