“Pay attention to what I say, not what I do…”
More and more – over decades of practice – this opening statement has become the golden rule of marketing and communications, no matter if that “marcom” strategy is being applied in the context of finance, economics, politics – or, any other blood sport. Reason being: If you believe that perception is reality, then perception can have real economic consequences. However, with today’s data ubiquity and resulting overload, we have the possibility of infinite perceptions and very little sense of reality…
No one is truly to blame for this predicament. We have all conspired – most of us tacitly, some of us more directly – to participant in this confidence game. And so, when Alphacution picks out certain names, it is only to shed light on examples of how the game is played and not to pass judgement on the player(s) – since we are all more or less complicit… (As it turns out, Deutsche Bank is one of our best models because they are more transparent with their disclosures than most.)
So, with this one, I want to put the conclusion and key insight right up front: 1) Things are said to create short-term perceptions with the comfort that very few are ever going to perform a “reality check,” and 2) if you believe – as we do – that markets and players are all interconnected, then if you figure out how to perform consistent reality checks then those findings can help predict sympathetic impacts and provide incremental intelligence for markets, related players and stakeholders…
The good news is that the data confirming a connection between any two points A and B lives somewhere; often hiding in plain sight. At least, this has been our working hypothesis all along. Now, maybe that data is not in the obvious place, or released at the obvious time. Maybe it gets disclosed periodically or asymmetrically and not regularly, but somewhere where it serves the needs of the specific stakeholders at the appropriate time. So, when we conduct a specific case study, we are not only thinking about the direct implications of the findings but, perhaps as importantly, the contextual implications of the findings, as well.
This preamble brings us to one of the more recent teachable moments provided by Deutsche Bank (DB). Consider the following as you review it: What do these findings suggest about DB’s operating strategy directly? And, as importantly, what do these findings suggest about the markets and players around DB?
Here’s some specifics:
In a media release dated April 26, 2018, DB announced strategic adjustments to reshape its Corporate & Investment Bank (CIB) division and additional cost reduction measures after reporting the latest in a string of annual and quarterly losses. In late May, further details emerged that at least 7,000 jobs – mainly in the US and Asia – are at risk for termination.
Does anyone hear an echo in here? (We did.) Because in February 2017, DB made an oddly similar announcement, at that time claiming 9,000 jobs were expected to be on the chopping block. Shortly thereafter, Alphacution put its modeling to task to “predict the pace of shrinkage” of DB given the latest announcement. That analysis can be reviewed here and in the chart below – where we illustrate various scenarios (based on historical quarterly changes in headcount) for the pace at which DB could likely shrink from nearly 100,000 employees to a target of roughly 90,750 employees.
(Note that the importance of this analysis is to understand and quantify a management process and the pace at which a major player can downsize with the belief that this case study, and its findings, will come in handy elsewhere…)
So, with the latest headcount tally at 97,130 (for the quarter ending March 31, 2018) – which is a reduction of ~2,600 from the 2017 layoff announcement – we wonder if this latest news represents a fresh round of layoffs or a continuation of the previous announcement. After all, DB has developed a reputation for playing a game of “three-card monte” by reorganizing its business units and the reporting that goes with that; the tactic having the impact of hiding and confusing…
Now, as we have implied above, these maneuvers are not unique to DB at all. They are standard industry practice. If a company – particularly a public company with regulatory disclosure requirements – wants to disguise weakness it will often reorganize or reshuffle its reporting taxonomy and/or engage in acquisitions and sales so as to obfuscate the financial results via restatements. Our recent analysis of Nasdaq – and the case of the missing market data – is another example of these phenomena. Additionally, layoffs announcements are used to telegraph cost reductions; share buyback announcements – another common communications tactic – are used to telegraph ongoing stock support.
Anyway, our guess is that DB is still targeting total headcount of 90,000 – 91,000 based on the original 2017 planning, but doesn’t want to get into the weeds about distinguishing between old announcements vs. new announcements. Fair enough. These days, it’s usually simpler to pretend that each day is a blank canvas, and there is no point in rehashing the past when a new announcement will serve the purpose. Besides, who has time to circle back for an explanation?
In this case, DB’s main objective is to protect the value of their stock and their franchise by assuring stakeholders that management is taking bold action, a component of which is to right-size costs given current drivers and opportunities. Whether they ever complete a plan is less important because plans have a tendency to change often.
Long story short, here’s the new headcount picture:
Since peaking in 2010, much of the headcount reductions at DB have come from the home base in Germany. But now, with the goal of protecting home base – and the core European franchise – staffing cuts are expected to come primarily from the secondary markets in APAC and the Americas (mainly US). See breakdowns in the chart below. More specifically, the CIB division’s equity sales and trading business, which has declined for 3 years running, is set to receive much of the headcount reduction focus.
Given what we already know (and have written) about consolidations, declines, departures and shut-downs in the brokerage and market-making end of the industry continuum, DB’s moves are incremental to the continuation of those types of shrinkage and concentration themes – as well as demonstrating how incumbencies will protect core business, in this case in Germany and surrounding EMEA.
Bonus Chart –
On an entirely different note, remember in early 2015 when DB announced that it had entered into a 10-year deal to outsource the maintenance and management of its technical infrastructure (and certain applications) to HPE? (If not, you can refresh your memory here.)
Well, ever wonder how that arrangement is working out after 3 years? It’s important to keep track. Because how a monumental deal like that plays out over time has major ramifications as a template for the rest of the big bank players and other key market intermediaries…
We will let this picture hang there for now – and circle back with more of this story in Part 2. Stay tuned…
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