By Thomas Atkins
FRANKFURT, June 2 (Reuters) - Deutsche Bank AG's pitch to investors on the merits of its planned 8 billion euros($11 billion) share issue comes with an ambitious cost-savingsvow, vital if it is to boost key performance measures in linewith rivals.
Deutsche portrays itself as Europe's last man standing inglobal investment banking after rivals such as Barclays Plc and UBS AG scaled back their operations inthe lucrative but risky field, arguing its share issue willensure it is positioned to vacuum up business they abandonedonce bond markets recover.
But those familiar with detailed plans at the investmentbank - Deutsche's biggest division by far - say management isbetting more on cost cuts than a market boom to help it meetrivals' key performance ratios, at least in the short to mediumterm, given that a boom remains out of sight.
"It's all about costs," said one senior official close toDeutsche's plans for investment banking. "On the revenue side... we're not counting on any kind of uptick ... But that's anextra bonus for when the world normalises."
Slides that Deutsche executives have showed to investorsinclude a map plotting the path to efficiency, a target of 65percent in the cost-to-income ratio by 2015, an improvement on77 percent at the end of March. The target is adjusted, meaningit excludes costs for nasty stuff like litigation andrestructuring costs.
Not highlighted by the bank, or widely seized on byinvestors who will pay for the share issue, the slide depictsroughly 1 billion euros in new cuts described only as"management action", which come on top of the 2.3 billion eurosin cuts already promised.
Those are likely to hit things like infrastructure andprocesses more than people, said the person close to theinvestment bank plans, without being any more specific.
A spokesman for the bank declined to elaborate on the natureof the cuts.
TRACK RECORD
The current management team's track record in deliveringcost cuts promised in 2012 so far has been good. Co-ChiefExecutives Anshu Jain and Juergen Fitschen have led cuts of 2.3billion euros since 2012.
But the size of the remaining challenge - to eliminateroughly 3.3 billion euros in additional cuts by end-2015 - hasled analysts at Morgan Stanley, for example, to predict Deutschewill hit a post-tax return on equity (RoE) of only 8 percent by2016, far below the 12 percent sought by the bank.
Deutsche delivered an RoE after tax of 7.9 percent in thefirst quarter, close to Barclays at 7.1 and Credit Suisse at 8 percent but far below the 10 percent recorded byU.S. rival JPMorgan.
Even if it does deliver its cost-saving targets, the bankstill faces huge new expenses that are both unpredictable andunquantifiable.
Some of the new expenses, which were only revealed with theshare issue plans, include roughly 1.2 billion euros in newmoney for "additional regulatory and control costs" meant toaddress tougher sector-wide rules, according to Reuterscalculations based on the plans.
Perhaps the biggest expense will be the one that is hardestto quantify - litigation - which remains, as it has for the pasttwo years, the greatest threat to a turnaround.
Fines and settlements have cost the bank over 5 billioneuros in the past two years and some analysts expect up to 3billion more in the next two years.
The unpredictability has led the bank to caution investorsthat all of its targets are under threat from unexpectedly heavyfines and that honouring previous promises to clean the slate in2014 is out of the bank's hands.
"It's simply not a serious answer to say we'll be done (withlitigation) by the fourth quarter," said a second executiveclose to Deutsche Bank strategy and thinking. "Because we reallydon't know." ($1 = 0.7328 Euros) (Editing by David Holmes)
Barclays (BARC)
