Deutsche Bank is set for grave changes after announcing a loss of €6.2 billion ($6.96 billion) for the third quarter on Wednesday.
The world’s 13th-largest bank in terms of assets is also not expected to pay shareholders a dividend this year. The bank’s stock dropped about six percent on the Frankfurt exchange after the announcement.
“The trouble for Deutsche Bank is that its conventional retail banking operations are not a significant profit center. To maintain margins, Deutsche Bank has been forced into riskier asset classes than its peers,” wrote analysts under the pseudonym ‘Tyler Durden’ in a note published on ZeroHedge on Thursday.
Deutsche Bank CEO John Cryan warned in a memo posted on the bank’s website on Wednesday that large-scale layoffs are to be expected. Cryan, who became CEO in July, has announced plans to restructure the bank, the details of which will be announced on October 29.
The bulk of the write-down stems from the bank’s need to increase its capital reserves to the amount required by international banking regulation included in the Basel III proposals. About €5.8 billion ($6.5 billion) has been set aside for this purpose, the bank said in a statement released on Wednesday.
There is also a €600 million ($674 million) write-down based on the revision downward of the value for the Deutsche bank-owned Hua Xia Bank in China, acquired in 2005, the statement said.
And the bank said that the amount it expects to gain from the sale of its subsidiary Postbank has been revised lower. Deutsche Bank acquired Postbank in 2010.
Deutsche Bank also has risky bets on derivatives that have to be covered. “Deutsche Bank is sitting on more than $75 trillion in derivatives bets – an amount that is 20 times greater than Germany’s GDP. Their derivatives exposure dwarfs even JP Morgan’s exposure – by a staggering $5 trillion,” ‘Durden’ said.
Cryan is pursuing a strategy of cost-cutting and restructuring, and some analysts believe it will work.
In a note published on Tuesday, Goldman Sachs analyst Jernej Omahen kept the bank’s rating at ‘neutral,’ while cutting his expected share price to €33 from €34.60. Omahen said that risks were within limits at Deutsche Bank, and that an ambitious cost-cutting program had to be undertaken.
In his memo, Cryan told employees that compensation would be reviewed and plans for staff reduction undertaken.
“In my letter to you on my first day in this role, I said that I would seek to improve our internal communication by speaking directly to you. I also did say that I was not expecting all would be sweetness and light in the coming year,” he wrote.