Progress on cost-cutting measures
Deutsche Bank’s (DB) cost-cutting measures had some positive impact on the company in 3Q16, but it still has a long way to go. During the quarter, operating expenses fell 50% to 6.5 billion euros. 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) have forecast 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 high at 86.7%. This ratio shows how revenues fuel a bank’s operating expenses.
Deutsche Bank expects to reduce this ratio 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, which is higher than the same period in 2015. However, compensation expenses fell 13% due to lower variable compensation.
While Deutsche Bank is making progress in a turnaround, 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 impacting banks such as Credit Suisse (CS), UBS, and Barclays (BCS).