Deutsche Bank is supposed to be cutting costs this year. Pay inflation at the investment bank means things aren't exactly going to plan.
Spending on compensation and benefits at Deutsche's investment bank rose by 15% year-on-year in the first quarter, versus an increase of just 1% across the bank as a whole. Deutsche set aside an extra €50m for bonuses in the first three months of 2022; pay spending in the investment bank was up €79m in total year-on-year to match the elevated level at the end of 2021.
This wasn't supposed to happen: Deutsche Bank is supposed to be cutting costs and growing revenues this year as it seeks to cover its 10% cost of capital. Instead, the bank said today that its efforts to cut costs from "workforce reduction" had been "offset by payroll inflation and by the impacts from variable compensation [bonuses]."
Pay spending in the investment bank increased even though overall headcount remained flat. However, headcount in the front office specifically rose by 1% or 28 people versus the first quarter of last year as Deutsche engaged in "selected strategic investments." In a statement accompanying today's results, CFO James Von Moltke suggested the bank is having to pay more to hire people: “We continue to execute on efficiency measures aimed at reducing compensation costs, however, we are seeing increasing pressures as we compete to retain and attract talent.”
Rising spending on pay is offsetting some of the cost savings Deutsche has made elsewhere. The bank spent €162m less on IT and €53m less on consultants in the first quarter versus the fourth quarter last year.
Despite the pay pain, Deutsche's investment bank is looking fairly healthy (particularly compared to Credit Suisse's). The cost income ratio fell to 53.5% in Q1 and the return on equity was 16.1%. Many employees in the division should be shielded from any further restructuring as a result. However, this may not apply to DB's equity capital markets bankers, whose revenues fell by nearly 88% year-on-year. M&A bankers and macro traders are likely to be the biggest beneficiaries of the rise in bonuses.
Photo by Marc Rentschler on Unsplash
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