Deutsche Bank has unveiled one of the most radical banking overhauls since the financial crisis, closing swaths of its trading unit, cutting 18,000 jobs and hiving off €74 billion ($139b) of assets as it calls time on its 20-year attempt to break into the top ranks of Wall Street.
The struggling German lender confirmed it would close down its loss making equities trading business and shrink its bond and rates trading operations in a long-awaited announcement on Sunday afternoon.
The axe will fall hardest on the investment bank, where the balance sheet allocated to trading will be slashed by 40 per cent. Job cuts will start first thing on Monday morning in London and New York, and three top executives have been replaced.
The "sizeable workforce reductions" will "require uncomfortable decisions" chief executive Christian Sewing said in an internal memo to staff seen by the FT.
Deutsche will create new bad bank — dubbed a "capital release unit" — comprising €74bn of risk-weighted assets, equivalent to €288bn of leverage exposure on the balance sheet. The lender expects asset disposals will allow it to return €5bn to shareholders either via special dividends or share buybacks from 2022.
The new strategy signals a retreat from Deutsche's global ambitions and its aim to be Europe's main rival to Goldman Sachs. One year ahead of Deutsche's 150th anniversary, Mr Sewing is refocusing the lender on its historic foundations — financing German and European corporate clients and domestic retail banking.
"Today we have announced the most fundamental transformation," Mr Sewing said, adding that he was determined to "restore the reputation of Deutsche Bank."
Around €3bn of upfront restructuring costs will push the bank into a second-quarter net loss of €2.8bn, with the total bill expected to hit €7.4bn by 2022.
Deutsche said it did not plan to raise any additional capital to fund the revamp — of scant comfort to investors who have sunk €30bn into the bank over the past decade only to see its share price plunge — and confirmed it would not pay a dividend for the next two years.
Managers will target €6bn of cost cuts over the next three years to reduce annual expenses to €17bn. After the overhaul is complete the bank will be left with around 74,000 employees, down from 91,500 currently.
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Deutsche has also struck an agreement with regulators to gain more breathing space on its minimum common equity tier one ratio, the most important measure of balance sheet strength.
Investors — which include the Qatari royal family and US activists Cerberus and Hudson — have long pushed the bank for a radical restructuring.
Deutsche has been battling what its own chief financial officer has called a "vicious circle" of declining revenue, stubbornly high running costs, a falling credit rating and the increasing cost of funding.Pressure increased in April when a government-backed effort to orchestrate a merger with local rival Commerzbank ended in failure.
Deutsche's share price has rebounded 19 per cent since the Financial Times first revealed the plans for a bad bank in mid-June, compared to a 4 per cent increase in the wider German market.
The three top executives departing as part of the overhaul are investment banking chief Garth Ritchie, head of retail banking Frank Strauss and chief regulatory officer Sylvie Matherat.
Stefan Simon — a member of the supervisory board since his 2016 nomination by the Qatari royal family — will join the management board as chief administrative officer. A lawyer by training, he will take over parts of Ms Matherat's regulatory responsibilities.
Christiana Riley, the 41-year-old finance director of Deutsche's investment banking division, will join the management board as head of the lender's operations in the Americas.
Bernd Leukert, who left the management board of German software giant SAP in February, will join to oversee the bank's digitalisation, data and innovation.
In line with the shift away from risky trading activities, Mr Sewing is planning to move the corporate lending operations into a new unit which will also house Deutsche's global transaction bank.
This will be run by 39-year-old Stefan Hoops, who currently heads the global transaction bank. The division is supposed to combine all the services a company treasurer needs from lending to hedging to trade finance, payments, liquidity and cash management.
"This fundamental transformation is the right response to the major changes and challenges in the financial industry," chairman Paul Achleitner said. "Deutsche Bank has been through a difficult period over the past decade, but with this new strategy in place we now have every reason to look forward with confidence and optimism."
Deutsche also said it would invest another €4bn in improving its controls, combining its risk, compliance and anti-financial crime functions after a string of high-profile failings, including processing as much as €160bn of potentially suspicious transactions for Danske Bank's Estonian unit, and helping to launder $10bn in dirty money out of Russia.
The actions "are designed to allow Deutsche to focus on and invest in its core, market-leading businesses of corporate banking, financing, foreign exchange, origination and advisory, private banking and asset management," the lender said.