Deutsche Bank embarked Sunday on what may be its last chance to reverse a decade of decline, announcing that it would cut a fifth of its work force and slash operations in New York and London.
The reorganization and cost-cutting plan is reminiscent of the bloodletting that followed the financial crisis in 2008. Yet it comes at a time of relative prosperity, the cumulative effect of years of scandal and management missteps. The bank that once symbolized German economic prowess is effectively abandoning any hope of playing in the same league as Goldman Sachs or JPMorgan Chase, and struggling simply to remain relevant.
Ever since it planted its flag on Wall Street by acquiring Bankers Trust in 1999, Deutsche Bank has been trying to prove that global finance was not the exclusive territory of the American megabanks. But it did so by taking chances, including issuing hundreds of billions of dollars in high-risk derivatives and lending money to Donald J. Trump’s organization when other banks wouldn’t.
The financial crisis that began in 2008 exposed a history of sometimes criminal wrongdoing, including rigging interest rates, laundering money and violating United States sanctions against countries like Iran. The scandals, which persisted long past the crisis, eroded Deutsche Bank’s reputation and led to billions of dollars in fines. Regulators anxious to avoid any more financial crises forced Deutsche Bank and other lenders to take fewer risks.
Now the bank, based in Frankfurt, is refocusing on less glamorous, less hazardous businesses like helping German exporters manage financial transactions abroad. About 18,000 people will lose their jobs as Deutsche Bank closes or shrinks operations that sell stocks and bonds. One-third of the management board will leave the bank as part of the overhaul, and more than $300 billion in risky assets will be quarantined in a separate unit.
The question in the months ahead will be whether the turnaround effort by Christian Sewing, Deutsche Bank’s 49-year-old chief executive, comes too late. Other European banks like UBS of Switzerland and Barclays in Britain pared back their ambitions after the 2008 financial crisis, but Deutsche Bank clung to investment banking even as it continued to generate billions of euros in losses.
“We are returning to our roots and to what once made us one of the leading banks in the world,” Mr. Sewing said in a statement on Sunday.
The plan is also a big gamble, carrying significant immediate costs with no guarantee they will revive the bank. Severance payments and other expenses will total 7.4 billion euros, or $8.3 billion, through 2022, Deutsche Bank said. At the same time, revenue is certain to fall as the bank shrinks, creating the risk of a vicious circle of declining income and profits.
“Big question that’s now on the table is whether DB can shrink itself to heightened competitiveness and sustainable profitability without a merger of some sort,” Mohamed A. El-Erian, chief economic adviser at German insurer Allianz, said in a tweet.
More hesitant restructuring efforts are giving way to what the @FT and others see as a major overhaul at @DeutscheBank. Big question that’s now on the table is whether #DB can shrink itself to heightened competitiveness and sustainable profitability without a merger of some sort. pic.twitter.com/EdJbFlpNjo
— Mohamed A. El-Erian (@elerianm) July 7, 2019
The bank did not say how many of the 18,000 jobs to be eliminated will be in New York, London, Germany or other locations. But the cost-cutting focuses on the units that sell stocks and bonds, which are primarily in New York and London. The cuts are the largest by a bank since JPMorgan Chase laid off 19,000 people in 2013, according to Challenger, Gray & Christmas, a Chicago firm that collects data on job losses.
The overhaul announced on Sunday also calls for moving more than $300 billion in high-risk assets to a separate unit, where they will be sold off or retired. That is an attempt to address perceptions that Deutsche Bank continues to be burdened by toxic assets with the potential to produce big losses.
Deutsche Bank said that it expected to report a loss for the second quarter of 2.8 billion euros, or $3.1 billion, after subtracting the costs involved in carrying out the plan. Shareholders will not receive a dividend for 2019 and 2020, the bank said.
Until Mr. Sewing, an expert in risk management, took over last year, Deutsche Bank was led by investment bankers reluctant to make drastic changes. They continued to collect handsome paychecks even as the bank’s share price plummeted. Previous efforts to rein in spending or to remake the bank’s culture of recklessness proved inadequate. The plan outlined on Sunday, which the bank described as “radical,” is an attempt to break decisively with the past.
Deutsche Bank’s appetite for risk was perhaps epitomized by its relationship with Mr. Trump. Deutsche Bank continued to lend to the Trump Organization long after other lenders concluded that the risk was too great. In the last year, Deutsche Bank has also been burdened by investigations of lax money laundering controls and has been under intense scrutiny by regulators in the United States and Europe.
In what may be a belated effort to prevent future scandals, Deutsche Bank said on Sunday that it would invest 4 billion euros through 2022 to improve its internal controls and computer systems.
Deutsche was once the largest bank in Europe as measured by assets. But its stature has declined along with its share price, which has fallen 95 percent from its peak in 2007 to a record low in June. Yet there have been no known takeover offers, even though the bank could be had for a bargain price — a measure of how troubled it is considered within the industry.
An attempt to merge with Commerzbank, also based in Frankfurt, fell apart in April. Shareholders and other critics said the potential benefits were outweighed by the cost of trying to unify the two rivals.
The reorganization plan is an attempt to address the bank’s high operating costs in relation to revenue. The bank said it would reduce its cost-income ratio, a measure of efficiency, to 70 percent by 2022. That compares with 93 percent in the first quarter of 2019. The lower the number, the more efficient a bank is considered to be.
Mr. Sewing told shareholders in May that he was planning “tough cutbacks.”
That includes a management shake-up. On Friday the bank announced the departure of Garth Ritchie, the head of the investment bank.
On Sunday, the bank announced two other top executives will be leaving. They are Sylvie Matherat, the chief regulatory officer blamed for the bank’s failure to emerge from a history of scandal; and Frank Strauss, head of the unit that operates bank branches in Germany.
In recent years, Deutsche Bank has lost depositors to rivals like ING, a Dutch bank that serves German customers online. ING is more than twice as efficient as Deutsche Bank, measured by the number of customers each employee serves.
Painful changes to the German operations appear to have been postponed, however. The powerful union known as ver.di, which represents Deutsche Bank workers, endorsed the overhaul, saying in a statement that it expected most of the job cuts to take place in investment banking.
The plan announced Sunday does not address another urgent problem, the lack of profitable businesses with potential for growth.
Until the financial crisis, Deutsche Bank generated much of its profit from high-risk businesses like issuing and trading derivatives. One reason Deutsche Bank resisted cuts in investment banking for so long was that, properly managed, those businesses can be very lucrative.
But the bank was unable to stem a loss of market share to its American competitors. And regulators quashed many high-risk activities by requiring banks to use more of their own capital and less borrowed money.
“Deutsche Bank has been through a difficult period over the past decade,” Paul Achleitner, the chairman of Deutsche Bank’s supervisory board, said in a statement, “but with this new strategy in place we now have every reason to look forward with confidence and optimism.”