Progress on cost cutting
Deutsche Bank’s cost-cutting measures had some positive impact on the company in the third quarter, but the company still has a long way to go. During the quarter, operating expenses fell 50%. Lower litigation costs and the absence of a goodwill impairment primarily drove the decline. However, costs are expected to remain significant for the bank throughout the second half of the year as the bank expects to bear restructuring and severance charges of 0.3 billion–0.5 billion euros. To add to the trouble, analysts at Morgan Stanley (MS) are forecasting litigation charges of nearly 3.9 billion euros for 2016 and 2017.
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 87.4%. This ratio shows how revenues fuel a bank’s operating expenses. Deutsche Bank aims to reduce this ratio to 70% by 2020. A lower percentage is better, as it means lower expenses compared to revenues. The number of employees stood at 101,115 at the end of September, higher compared to last year. Compensation expenses, however, fell 13% due to lower variable compensation.
Deutsche Bank is making progress towards a turnaround, but weak market conditions are making matters worse. The weak economic environment is unlikely to improve soon, especially in Europe, (EUFN) where negative interest rates are hurting banks like Credit Suisse (CS), UBS, and Barclays (BCS).
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