Way back in the mists of time Christian Sewing set out to save Deutsche Bank.
Back then – this was July 2019 – its stock was trading at around €7, against an all-time high of €119. Sewing, then in the top job for a little over a year, pledged to reinvent the ailing German lender.
In a story titled ‘Sewing’s savings’, Euromoney asked if his overhaul plans were too bold or if they did not go far enough. We pointed to his aim of posting a return on tangible equity of 8% by 2022, against just 0.5% a year earlier. Ambitious – yet it still lagged its rivals. JPMorgan had just posted a full-year RoTE of 17%.
Also notable was a push to slash its cost-to-income ratio to 70% in 2022, from 92% in 2018, aided by a cull of 18,000 jobs. Sewing called the target “non-negotiable”.
Credit where credit is due: he nearly did it. Last year, the core bank posted a cost-to-income ratio of 75%, down from 84.6% in 2021 and 88.3% in 2020.
But arguably even more impressive is the performance of its private bank. In the full year 2022, the business posted a cost-to-income ratio of 72%, with a post-tax ROTE of 10.6%. The year before, the cost ratio was 90%. The one before that – 2020 – it was 99%.
Cost-to-income ratio
This isn’t the way it is supposed to be. It is usually more expensive to run a private bank than it is to run the universal bank that surrounds it – and for good reason.
Wealth management businesses aren’t cheap to run. Salaries are high. The best relationship managers can go head-to-head with senior investment bankers on remuneration. Moreover, adding net new assets – the lifeblood of a private bank – is not easy. Some banks do this by poaching entire teams of RMs from rivals, a move that adds to staffing costs.
As a result, the ratios are usually reversed. In 2022, UBS posted a cost-to-income ratio of 72.1% for the group, and 76.9% for global wealth management. The respective numbers a year earlier were 73.6% and 75.5% – and this from a firm that didn’t get to be the world’s largest wealth manager by invested assets without being scrupulous about efficiency.
Strategically, our theme centred on focus and simplification, coupled with what I would call super-diligent and disciplined execution
How did Deutsche manage to lower its costs?
Sandra Wirfs, global chief operating officer at Deutsche’s International Private Bank (IPB), reckons the key was to approach the challenge by going back to basics.
“Strategically, our theme centred on focus and simplification, coupled with what I would call super-diligent and disciplined execution,” she tells Euromoney. “We asked ourselves: ‘How can we really tackle our cost base to allow us to truly grow in a cost-efficient way?’”
Her division, formed in 2020 by merging the old private and commercial business international with the wider wealth management group, set out to streamline its model.
Over the past two years, it cut its roster of active booking centres – locations where client money and assets are deposited and booked – by more than a third, to 12. And it winnowed out products it saw clients did not need.
“If you add up all the products we sell on the IPB shelf, you end up in with a very long list,” she says. “We went through them all and said: ‘Which are the products we want to offer to our target clients going forward, and which can we take out?’”
The bank also looked to sell or run down assets it considered a bad fit. Case in point: the sale in October 2022 of Deutsche’s financial advisers network in Italy – comprising 1,085 client advisers with €16.5 billion in assets under management – to Zurich Bank for €310 million.
Laser focus
Technology has played its part too. Amid a lot of chatter about ‘agile’ working, Wirfs points to an almost fervid devotion to jettisoning applications deemed surplus to requirements (100 were eliminated by IPB crew over the past three years) and creating new apps – a new US core banking platform; a new portfolio management business in Germany – that retain or attract new business at marginal additional cost.
So – where does the IPB’s cost-cutting crusade go from here? Wirfs says she’s not letting down her guard.
“Often, what happens after the first two years of the journey is [that] people relax and go: ‘Oh, nice, right, we did it – now we can go back to normal’. We won’t let this happen and will stay laser-focused and disciplined on the execution of our strategy.”
Can the private bank cut out a little extra fat? There is scope to do so.
Julius Baer, shorn of the burden of delivering investment, commercial or retail banking to clients, posted a cost-to-income ratio of 65.9% in 2022; the Swiss pure-play private bank’s target is 64% by 2025.
“I would say that the low 70s is a good place to be at the moment, while going forward our clear aim is to go below 70,” she says.
