Mashreqbank PSC, Dubai’s third-biggest lender, plans to move nearly half of its employees to cheaper locations and allow some others to work from home as part of a dramatic reorganization that will spare its Emirati staff, according to people familiar with the matter.
The oldest privately owned bank in the United Arab Emirates notified employees this week that it will be shifting jobs to locations including India, Egypt or Pakistan, the people said, asking not to be identified because the information isn’t public.
Mashreq will also eliminate a significant number of existing roles and create new positions for staff moving to what it calls “centers of excellence,” they said.
The bank didn’t immediately respond to an email seeking comment. Mashreq and its subsidiaries employed almost 5,000 people as of September 2019.
As the pandemic transforms how and where people work, the planned move is an echo of a shift by other financial firms that are looking to set up bases in lower-cost locations. In the U.S., companies from Goldman Sachs Group Inc. to Paul Singer’s Elliott Management Corp. have looked outside Manhattan and bulked up their presence in Florida.
Bank Overhaul
Lenders around the world have cut thousands of jobs as they slash costs to weather an economic downturn and adapt to a move to digital services. Banks in the Gulf’s expatriate-dominated economies additionally have had to contend with a period of lower oil prices and weaker profitability.
While shifting back-office operations to cities where salaries are a fraction of what bankers earn in the UAE isn’t entirely new, the scale of the planned shift by Mashreq is sizable.
Some employees will be permanently allowed to operate remotely in the offshore centers, the people said. The company is planning to lower salaries for an additional 7% of its remaining UAE staff by turning those jobs into work-from-home positions.
The relocation plan is expected to be completed in three phases by October this year. The changes will exclude Mashreq’s Emirati employees, the people said.
As a part of the 50 years celebration, Mashreq has launched ‘#HeritageSeries – Connecting with UAE’ with Gulf News. The first episode of the Heritage Series is E11: The Road that Unites the UAE. In this chapter, we look at how the development of the E11 highway tells the story of overcoming old divisions and building the Union. The E11 is a notable and enduring symbol of the diversity of the UAE. The E11 is the spine of the UAE. As quoted by Abdul Aziz Al Ghurair, “The E11 joined the country: it brought us closer together, doing business became easier, and the tangible activity along the road spells out its success today. In much the same way that the E11 has endured, thrived and grown to be a great unifier across this nation, the growth at Mashreq has run parallel alongside it. We grew together, endured many changes in the environment and today, both are living symbols of a unified country.” Know more: http://bit.ly/M50HeritageSeries Read More: http://bit.ly/mashnews50yrs
HSBC will not name a permanent chief executive when it unveils a major strategic overhaul later this month, despite investor expectations that a new boss would be in place before the plan is announced.
Noel Quinn, who was appointed interim chief executive of the bank six months ago, is preparing to announce the strategic shake-up alongside HSBC’s full-year results on 18 February.
The cost-cutting drive will involve a new round of job cuts targeting senior managers and reducing the bank’s presence in smaller markets, according to Reuters. The Financial Times reported in October that the restructuring e could involve up to 10,000 top losses.
HSBC chairman Mark Tucker had previously said that the search to replace John Flint, who was ousted as chief executive in August last year after just 18 months at the helm, would take between six and 12 months.
But three of the bank’s top 20 shareholders told the FT they were expecting either Quinn or an external candidate to be named as Flint’s successor before the overhaul was unveiled.
Citing four people briefed on the plans, the paper reported that the search for a permanent chief executive was still ongoing.
A spokesperson for HSBC declined to comment on the reports, but reiterated that the process of appointing a permanent chief executive would take six to 12 months.
HSBC posted a 19 per cent drop in profit for the third quarter, a performance Quinn branded “not acceptable”.
Quinn has previously told Reuters: “There is scope throughout the bank to clarify and simplify roles, and to reduce duplication”.
“It would be very, very odd to have what is being trailed as a large restructuring effort, potentially the most radical we’ve seen from the bank, that is not implemented by the guy who designed it,” one top 20 shareholder told the FT.
“They have had six months, which is long enough to assess internal and external candidates, so if they’re not announcing someone, it is quite obvious there is an internal debate as to whether Noel is the right person.”
Dec.09 — HSBC Holdings PLC’s Samir Assaf will be replaced as head of the global banking and markets division as interim Chief Executive Officer Noel Quinn overhauls the bank’s senior management team. Bloomberg’s Sonali Basak reports on “Bloomberg Daybreak: Americas.”
The sky is the limit,” gushes MoneyLion founder and CEO Dee Choubey as he strolls into Manhattan’s Madison Square Park, the oak and ash trees turning color in the October sunshine.
Choubey, 38, is taking a midday constitutional from MoneyLion’s cramped offices in the Flatiron District, where 65 people labor to reinvent retail banking for the app generation. He ticks off a couple businesses he looks up to—ones that have fundamentally changed the way money flows around the world—putting his ambitions for his six-year-old startup into sharp relief. “PayPal,” he says. “Square.” Two companies worth a combined $150 billion.
“The promise of MoneyLion is to be the wealth manager, the private bank for the $50,000 household,” Choubey says.
At last count, MoneyLion’s app had 5.7 million users, up from 3 million a year ago, and a million of those are paying customers. Those people, many from places like Texas and Ohio, fork over $20 per month to maintain a MoneyLion checking account, monitor their credit score or get a small low-interest loan. In all, MoneyLion offers seven financial products, including unexpected ones like paycheck advances and, soon, brokerage services. Choubey expects revenue of $90 million this year, triple last year’s $30 million. His last round of financing, when he raised $100 million from investors including Princeton, New Jersey-based Edison Partners and McLean, Virginia-based Capital One, valued the company at nearly $700 million. By mid-2020, he predicts, MoneyLion will be breaking even. An FDIC-insured high-yield savings account will be rolled out soon, while credit cards are on the schedule for later in 2020. To retain customers, he says, “we have to be a product factory.”
Like most other entrepreneurs, Choubey thinks his company’s potential is essentially unlimited. But having spent a decade as an itinerant investment banker at Citi, Goldman, Citadel and Barclays, he’s also a guy who knows how far a horizon can realistically stretch. And he is far from the only one to see the opportunity for upstart digital-only banks—so-called neobanks—to transform retail banking and create a new generation of Morgans and Mellons. “I just heard a rumor that Chime is getting another round at a $5 billion valuation,” he says.
Leading the Neobank Pack
In 20 years, these VC-backed startups could dominate consumer banking, but they’ll face plenty of competition. Fintech companies that originally offered investing are rushing to add bank services.
Sources: the companies, CB Insights, PitchBook.
Globally, a vast army of neobanks are targeting all sorts of consumer and small-business niches—from Millennial investors to dentists and franchise owners. McKinsey estimates there are 5,000 startups worldwide offering new and traditional financial services, up from 2,000 just three years ago. In the first nine months of 2019, venture capitalists poured $2.9 billion into neobanks, compared with $2.3 billion in all of 2018, reports CB Insights.
Underlying this explosion is new infrastructure that makes starting a neobank cheap and easy, plus a rising generation that prefers to do everything from their phones. While it can take years and millions in legal and other costs to launch a real bank, new plug-and-play applications enable a startup to hook up to products supplied by traditional banks and launch with as little as $500,000 in capital.
“Now you can get your [fintech] company off the ground in a matter of a few months versus a few years,” says Angela Strange, a general partner at Andreessen Horowitz, who sits on the board of Synapse, a San Francisco-based startup whose technology makes it easier for other startups to offer bank products.
Using such middleman platforms, tiny neobanks can offer big-bank products: savings accounts insured by the FDIC, checking accounts with debit cards, ATM access, credit cards, currency transactions and even paper checks. That frees fintech entrepreneurs to concentrate on cultivating their niche, no matter how small or quirky.
Take “Dave.” Dave (yep, that’s its real name) is a little app that rescues folks from the pain of chronic bank overdraft fees. Created by a 34-year-old serial entrepreneur named Jason Wilk who had no prior experience in financial services, Dave charges its users $1 a month and, if they seem likely to overdraw, instantly deposits up to $75 as an advance. Nice little business, but nothing to give Bank of America jitters.
Franco Vogt for Forbes
Betterment cofounder Jon Stein at his New York City startup. It took a decade to get 420,000 clients for its robo-advisor business managing stocks and bonds; as a neobank newcomer, Betterment already has 120,000 on a waiting list for a checking account.
But then Wilk decided to turn Dave into a neobank. In June, using Synapse, Dave rolled out its own checking account and debit card. Now it can make money on “interchange,” the 1% to 2% fees that retailers get charged whenever a debit card gets swiped. These fees are split between banks and debit-card issuers like Dave. Wilk optimistically predicts Dave will bring in $100 million in revenue this year from its 4.5 million users—up from $19 million in 2018, the year before it transformed itself into a neobank. Dave was recently valued at $1 billion.
Established fintech companies that didn’t start out in banking are getting into the game too. New York-based Betterment, which manages $18 billion in customers’ stock and bond investments using computer algorithms, recently rolled out a high-yield savings account. It pulled in $1 billion in deposits in two weeks. “The success has been unprecedented. In our history we’ve never grown this fast,” marvels Betterment CEO and cofounder Jon Stein. Now he’s launching a no-fee checking account with a debit card, and credit cards and mortgages might be next, he says.
Neobanks are swiftly emerging as a huge threat to traditional banks. McKinsey estimates that by 2025 up to 40% of banks’ collective revenue could be at risk from new digital competition. “I don’t believe there’s going to be a Netflix moment—where Netflix basically leapfrogs Blockbuster—where fintechs basically put the banks out of business,” says Nigel Morris, a managing partner at QED Investors, an Alexandria, Virginia-based VC firm specializing in fintech. “[Traditional banks] are really complicated businesses, with complex regulatory issues and consumers who are relatively inert.” But, he adds, “If [neobanks] can get people to bundle, [they] can get more of a share of a wallet of a consumer. [The] economics can move dramatically. It changes the game.”
Diwakar (Dee) Choubey was supposed to be an engineer, not an investment banker. Born in Ranchi, India, he came to the U.S. at 4 when his father was finishing a graduate degree in engineering at Syracuse University. The family ended up in New Jersey. Choubey’s mom taught autistic children, while his dad worked as an engineer at Cisco—and plotted his son’s future.
When Choubey started at the University of Chicago in 1999, he signed up for a bunch of computer science classes picked by his dad. But after earning a couple of B-minuses, “I cried uncle,” Choubey says. He became an economics major, strengthening his grades and job prospects by taking corporate finance and accounting courses at the business school. After graduating with honors, he went into investment banking, where he remained for the next decade.
From an insider’s vantage point, he saw that traditional banks were excruciatingly slow to respond to the preferences of their customers and exploit the power of smartphones. That, plus a never-ending series of bank scandals, convinced him that there was an opening for a digital “private banker.” In 2013 he walked away from his near-seven-figure salary to start MoneyLion.
Choubey raised $1 million in seed funding and started out offering free credit scores and micro-loans. But he struggled to raise more money. Forty venture investors turned him down, deeming his vision impractical and unfocused. “I was laughed out of a lot of VC rooms in our early days,” he recalls.
While Choubey banged unsuccessfully on VC doors, MoneyLion putt-putted along, bringing in a little revenue from loan interest and credit card ads and collecting a bunch of data on consumer behavior. Finally, in 2016, he persuaded Edison Partners to lead a $23 million investment. That enabled MoneyLion to add a robo-advisor service allowing users to invest as little as $50 in portfolios of stocks and bonds. In 2018, it added a free checking account and debit card issued through Iowa-based Lincoln Savings Bank.
Managing rapid growth, while striving to keep costs low, has proved tricky. MoneyLion was hit with a deluge of Better Business Bureau complaints over the past spring and summer. Some customers experienced long delays transferring their money into or out of MoneyLion accounts and, when they reached out for help, got only computer-generated responses. Choubey says the software glitches have been fixed, and he has bumped up the number of customer-service reps from 140 to 230.
Other neobanks have had operational growing pains too. In October, San Francisco-based Chime, with 5 million accounts, had technical problems that stretched over three days. Customers were unable to see their balances, and some were intermittently unable to use their debit cards. Chime blamed the failure on a partner, Galileo Financial Technologies, a platform used by many fintech startups to process transactions.
Franco Vogt for Forbes
Tim Spence, Fifth Third’s chief strategist, in the regional bank’s downtown Cincinnati headquarters. Most of his neobank competitors are losing money, but “the lesson . . . learned from Facebook and Amazon and Google . . . is that the internet is amenable to a winner-take-all market structure.”
On a warm fall day Tim Spence speed-walks his 6-foot-3 frame through the towering, 31-story Cincinnati headquarters of his employer, Fifth Third, a 161-year-old regional bank with $171 billion in assets. Clad in a plaid sport jacket with no tie, Spence doesn’t look like a traditional banker. And he’s not.
A Colgate University English literature and economics major, Spence, now 40, spent the first seven years of his career at digital advertising startups. He then moved into consulting at Oliver Wyman in New York, advising banks on digital transformation. In 2015, Fifth Third lured him to Ohio as its chief strategy officer and then expanded his mandate. He now also oversees consumer banking and payments, putting him in charge of $3 billion worth of Fifth Third’s $6.9 billion in revenue. Last year, he brought home $3 million in total compensation, making him the bank’s fourth-highest-paid executive.
Fifth Third has 1,143 branches, but today Spence is focused on Dobot, a mobile app the bank acquired in 2018 and relaunched this year. Dobot helps users set personalized savings goals and automatically shifts money from checking to savings accounts. “We reached 80,000 downloads in a matter of six months, without having to spend hardly anything on marketing,” he says.
Scooping up new products is one part of a three-pronged “buy-partner-build” strategy that Spence has helped devise to combat the neobank challenge. Partnering means both investing in fintechs and funding loans generated by the newcomers. Fifth Third has a broad deal with Morris’ QED, which gives it a chance to invest in the startups the VC firm backs. One of Fifth Third’s earliest QED investments was in GreenSky, the Atlanta-based fintech that generates home remodeling loans (some funded by Fifth Third) through a network of general contractors.
The best of these partnerships provide Fifth Third access to younger borrowers, particularly those with high incomes. In 2018, it led a $50 million investment in New York-based CommonBond, which offers student-loan refinancing to graduates at competitive interest rates. Similarly, Fifth Third has invested in two San Francisco-based startups: Lendeavor, an online platform that makes big loans to young dentists opening new private practices, and ApplePie Capital, which lends money to fast-food franchisees.
Funding Bonanza
Global venture capital funding for digital banks is exploding. This year, it’s on pace to exceed 2017 and 2018 combined.
Source: CB Insights
“The thing I’m most envious of, when it comes to the venture-backed startups that we compete with, is the quality of talent they’re able to bring in. It’s really remarkable,” Spence says.
But while Spence envies them sometimes and partners where he can, he isn’t convinced the neobanks will make big inroads into traditional banks’ turf. “None of them have shown that they can take over primary banking,” he says. He also argues that having physical retail branches is still important for building long-term relationships with customers. In a recent Javelin survey of 11,500 consumers, an equal number rated online capabilities and branch convenience as the most important factors when deciding whether to stick with a bank.
Fifth Third has been reducing its overall number of branches an average of 3% a year, but it’s opening new ones designed to be Millennial-friendly. These outlets are just two thirds the size of traditional branches. Instead of snaking teller lines, there are service bars and meeting areas with couches. Bankers armed with tablets greet customers at the door—Apple Store-style.
That raises the question of whether any of the neobanks will be so successful that they’ll eventually open physical outposts, the way internet retailers Warby Parker, Casper and, of course, Amazon have done. After all, it’s happened before. Capital One pioneered the use of big data to sell credit cards in the early 1990s, making it one of the first successful fintechs. But in 2005 it started acquiring traditional banks, and today it’s the nation’s tenth-largest bank, with $379 billion in assets and 480 branches.
I cover fintech, cryptocurrencies, blockchain and investing at Forbes. I’ve also written frequently about leadership, corporate diversity and entrepreneurs. Before Forbes, I worked for ten years in marketing consulting, in roles ranging from client consulting to talent management. I’m a graduate of Middlebury College and Columbia Journalism School. Have a tip, question or comment? Email me jkauflin@forbes.com or send tips here: https://www.forbes.com/tips/. Follow me on Twitter @jeffkauflin. Disclosure: I own some bitcoin and ether.
Dear banks, Game Over. Disruptive challenger banks are here to wipe the floor with traditional banks, who have, according to Chad West, head of comms and marketing at challenger bank Revolut, failed to make their offering open and transparent to customers, and failed to give them control over their money. Digital bank alternative Revolut has scaled to 1.8 million customers in three years – and now offers cryptocurrency processing. ABOUT WIRED SMARTER Experts and business leaders from the worlds of Energy, Money and Retail gathered at Kings Place, London, for WIRED Smarter on October 9, 2018. Discover some of the fascinating insights from speakers here: http://wired.uk/V29vMg ABOUT WIRED EVENTS WIRED events shine a spotlight on the innovators, inventors and entrepreneurs who are changing our world for the better. Explore this channel for videos showing on-stage talks, behind-the-scenes action, exclusive interviews and performances from our roster of events. Join us as we uncover the most relevant, up-and-coming trends and meet the people building the future. ABOUT WIRED WIRED brings you the future as it happens – the people, the trends, the big ideas that will change our lives. An award-winning printed monthly and online publication. WIRED is an agenda-setting magazine offering brain food on a wide range of topics, from science, technology and business to pop-culture and politics. CONNECT WITH WIRED Web: http://po.st/WiredVideo Twitter: http://po.st/TwitterWired Facebook: http://po.st/FacebookWired Google+: http://po.st/GoogleWired Instagram: http://po.st/InstagramWired Magazine: http://po.st/MagazineWired Newsletter: http://po.st/NewslettersWired
Numerous indicators in the U.S. and around the world are signaling a slowing economy at best and a near-term recession at worst. The slowing global economy, along with low interest rates, ongoing trade tensions, and intensifying Brexit uncertainty will weigh on banks’ profitability for the foreseeable future. In the US, whatever benefits banks derived from Trump’s tax reform, if any, are long gone.
Global Macroeconomic Outlook for the G-20
Moody’s Global Macroeconomic Outlook, August 2019
Last week’s announcement from Coalition that American and European investment banks’ capital markets and advisory’s revenues hit a thirteen-year low is likely to be the beginning of more challenges to come. Even before that announcement, Moody’s Investor Services had changed its positive outlook on global investment banks to stable precisely due to slower economic growth and lower interest rates.
Drivers of Moody’s Stable Outlook for Global Investment Banks
Moody’s Investors Services
As a recession comes closer, bank risk managers, investors, regulators, and rating agencies will be monitoring banks’ loan impairments carefully. According to the Fitch Ratings’ Large European Banks Quarterly Credit Tracker – 2Q19, released last week, “The economic slow down in Europe has not resulted in material new impaired loans yet, but the substantially weakened economic outlook has increased the likelihood of an at least modest increase in impaired loans.”
Impaired Loans/Gross Loans
Fitch Ratings, Large European Banks Quarterly Credit Tracker
Banks’ high holdings of leveraged loans and below investment grade bonds and securitizations, especially those that are less liquid and harder to value, will also weigh on their earnings as the global economy slowdown intensifies. Fitch Ratings’ recent ‘U.S. Leveraged Loan Default Insight’ shows that its “Top Loans and Tier 2 Loans of Concern combined total jumped to $94.1 billion from $74.5 billion in July. The Top Loans of Concern amount ($40.9 billion) is the largest since March 2017, with six names added to the list and nearly all bid below 70 in the secondary market.” Unfortunately, underwriting continues to deteriorate. The Federal Reserve Senior Loan Officer Survey showed a modest loosening of lending standards on corporate loans for the second consecutive quarter.
Fitch U.S. Leveraged Loan Default Index.
A slowing economy and low interest rate environment are outside of bank managers’ control. Yet, cost efficiency, is something that banks can influence; it needs to improve for banks to be more profitable. European banks’ median/cost income ratio, for example, is 66%. “The sector’s structural cost inefficiency will eventually have to be addressed given the persistently weak rate and revenue outlook. Improving cost efficiency faster and developing fee-generating businesses are crucial to sustain profitability in 2H19 and beyond.”
Fitch Ratings, Large European Banks Quarterly Credit Tracker
Global investment banks will also have to be very attentive to what changes need to be made to their business models. While there will be demand for their advisory and distribution services, the demand will slow down in what is likely an upcoming recession.
Source: Moody’s Investors
Moreover, as banks continue to lay-off front office professionals, some top latent to effect deals well will be lost. Volatility from Trump’s multiple front trade wars and Brexit will put a lot of pressure on banks with capital market activities.
Aggregate capital markets revenue first-half 2009-19 (USD billions)
Moody’s Investor Services
Banks in emerging markets are also under profit pressure. Many of the banks in Latin America already have a negative outlook by ratings agencies, particularly due to a slowdown in Mexico and recessionary pressures in Brazil. Asian banks are particularly sensitive to US-Chinese trade tensions.
Emerging Markets: Median GDP Growth by Region
Fitch Ratings
More than ever, to increase profitability, bank executives will need to find ways to diversify their revenue streams in all parts of their banks, commercial, investment bank, asset management as well as in custody and clearing services. Banks need to be profitable to be liquid and to be well capitalized to sustain unexpected losses. What worries me is that a slowing global economy, coupled with increasing deregulation in the US, such as the recent gutting of the Volcker Rule, will embolden banks to chase yield even more and take excessive risks that could imperil depositors and taxpayers. More than ever, investors, bank regulators, and rating agencies should remain vigilant so as to spare ordinary citizens the pain of when banks run into trouble.
When you’re thinking about money and wealth is hard not to include in that equation Banks. Someone said: Money makes the world go round” and banks, well, that’s where money likes to hang out. Every Aluxer we’ve met has close relations to at least one bank which makes it possible for us to enjoy life to the fullest. #2 *** HSBC Holdings is previously known as The Hong Kong and Shanghai Banking Corporation which was founded in 1865 in Hong Kong. However, in 1991-1992, after acquiring Midland Bank The Hong Kong and Shanghai Banking Corporation moved it’s headquarters to London because it was much better from a financial and strategic point of view.
This is the moment when the bank kind of re-branded itself and became HSBC Holdings the bank that you know today. With that said, we’d like you to enjoy our latest video on: the top ten richest banks in the world. Here we’re answering questions like; • Which is the richest bank in the world?! • How much money do the top banks have?! • Is Bank of America the richest bank in the world?! • Who owns the richest bank in the world? • How much money does the richest bank have?! Say Hello on: https://www.instagram.com/aluxcom/https://twitter.com/aluxcomhttps://www.facebook.com/EALUXE – SUBSCRIBE to ALUX: https://goo.gl/KPRQT8 WATCH MORE VIDEOS ON ALUX.COM! Most Expensive Things: https://goo.gl/09XcYJ Luxury Cars: https://goo.gl/eOUgfS Becoming a Billionaire: https://goo.gl/rRLgJI World’s Richest: https://goo.gl/m6emkX Inspiring People: https://goo.gl/KxqTdL Travel the World: https://goo.gl/g5BGmm Dark Luxury: https://goo.gl/20ZsSt Celebrity Videos: https://goo.gl/0cs6sx Businesses & Brands: https://goo.gl/otHsTB — Alux.com is the largest community of luxury & fine living enthusiasts in the world. We are the #1 online resource for ranking the most expensive things in the world and frequently refferenced in publications such as Forbes, USAToday, Wikipedia and many more, as the GO-TO destination for luxury content! Our website: https://www.alux.com is the largest social network for people who are passionate about LUXURY! Join today!
Deutsche Bank has issued its results for the second quarter of 2019. They make grim reading. The bank reported a headline loss of €3.1bn ($3.44bn), which it said was due to “charges relating to strategic transformation” of €3.4bn ($3.78bn). But both net income of £231m ($256.67m) and underlying profits of €441m ($490m) were significantly down on the same quarter in 2018.
The restructuring announced earlier this month has yet to impact fully. The “capital release unit” into which the bank plans to put €74bn ($82.22bn) of poorly-performing and non-strategic assets and business lines, including its entire equities trading division, is not yet up and running, and although headcount is about 4,500 lower than it was a year ago, the latest round of sackings doesn’t yet show up in the redundancy costs. Restructuring costs themselves therefore only contribute €50m ($55.56m) to the headline loss.
A further €350m ($388.89m) comes from junking software and service contracts that will no longer be needed because of the restructuring. But by far the largest part of the headline loss arises from impairment of goodwill to the tune of €1bn ($1.11bn) and a €2bn ($2.22bn) reduction in the value of the bank’s deferred tax asset.
This may sound like accounting gobbledegook, but it sends a very important message. Deutsche Bank’s management has admitted the bank will never return to the profitability of the past. When the restructuring is complete, it will be a much smaller, poorer bank.
First, the writedown of the deferred tax asset (DTA). A DTA arises when a firm pays taxes in advance and then suffers losses that wipe out that tax liability, resulting in an overpayment. Rather than claiming back the money, firms can “carry forward” the overpayment and use it to offset their tax liability in a subsequent reporting period. This “carried forward” amount is shown as an asset on the balance sheet.
However, a firm can only carry forward overpaid tax into subsequent periods if it is reasonably certain that the firm will eventually make enough profits to be liable for that amount of tax; and there is usually a time limit by which the deferred asset must be used. If the firm can’t generate enough profits to use the DTA, it is lost.
This is how Deutsche Bank explains its decision to write down the DTA (my emphasis):
Each quarter, the Group re-evaluates its estimate related to deferred tax assets, including its assumptions about future profitability. In updating the strategic plan in connection with the transformation the Group adjusted the value of deferred tax assets in affected jurisdictions. This resulted in total valuation adjustments of € 2.0 billion in the second quarter of 2019 that primarily relate to the U.S. and the UK.
Deutsche Bank has admitted that the deep cuts to the investment bank will result in profitability being significantly lower for the foreseeable future.
Now to goodwill. Goodwill can be regarded as another type of overpayment. It is the amount by which the purchase price of an asset or business exceeds the fair value of the tangible and intangible assets acquired and any liabilities taken on. Firms overpay for acquisitions when they expect them to deliver higher returns in future. But if they disappoint, then eventually the value of the “goodwill” must be reduced.
In two divisions – corporate finance, and the wealth management unit within its private & commercial banking division – Deutsche Bank has written off its entire goodwill, amounting to €491m ($545.56m) in corporate finance and €545m ($605.56m) in wealth management. Importantly, the notes to the accounts show that the write-off is not a restructuring cost; these are business lines that have been under-performing for quite some time. The bank blames “adverse industry trends” and “worsening macroeconomic assumptions, including interest rate curves.” This is code for “we thought interest rates would be much higher by now.” Revenues have persistently disappointed because of very low interest rates, and now that the European Central Bank has indicated that rates will stay low for the foreseeable future – and may even be cut further – there is no real prospect of recovery. These business lines are simply never going to make enough money to cover their acquisition cost. Cue transfer to the “capital release unit” as soon as it is up and running.
The good news is that the €3bn ($3.33bn) writedown of DTA and goodwill didn’t affect the bank’s capital. The all-important CET1 capital ratio stayed firm at 13.4%. But looking ahead, there are clearly more restructuring costs to come. The bank says it currently has provisions for about €1bn ($1.11bn). It expects to use all of this, and it may need more. And Deutsche Bank also faces further litigation charges which it admits could be considerable.
But the biggest problem is Deutsche Bank’s desperate lack of income. Troubled though it is, the investment bank is still Deutsche Bank’s biggest source of revenue. The planned cuts will slash that to the bone, and there is no evidence that any of the other divisions can step up to replace it. All Deutsche Bank’s divisions, apart from its asset manager DWS, have flat or declining revenues and poor profitability. Unless it can turn this around, the future looks very bleak.
Despite the management’s upbeat presentation, the share price fell on these results. Shareholders were clearly unimpressed with the promise of “jam tomorrow” in the form of dividends and share buybacks from 2022. Perhaps they, like me, were looking at the bank’s promise to turn ROTE of negative 11.2% today into positive 8% by 2022, and thinking, “I don’t believe a word of it.”
I used to work for banks. Now I write about them, and about finance and economics generally. Although I originally trained as a musician and singer, I worked in banking for 17 years and did an MBA at Cass Business School in London, where I specialized in financial risk management. I’m the author of the Coppola Comment finance & economics blog, which is a regular feature on the Financial Times’s Alphaville blog and has been quoted in The Economist, the Wall Street Journal, The New York Times and The Guardian. I am also a frequent commentator on financial matters for the BBC. And I still sing, and teach. After all, there is more to life than finance.
