By Christopher Thompson
LONDON (Reuters Breakingviews) - Deutsche Bank Chief Executive John Cryan wants his robot-like colleagues to embrace their inner “revolutionary spirit” as they stand to be replaced by artificial intelligence. Critics might retort there is nothing innovative in getting fired. Deutsche’s shareholders, though, should welcome Cryan’s comments, while the bank’s staff may justifiably feel uncomfortable. They are among the most vulnerable as bloated German lenders seek to slash their payrolls.
Faced with lower-for-longer interest rates and subdued credit demand, costs are one of the few levers banks have to boost profit. This is the real challenge posed by the technology alluded to by Cryan. Artificial intelligence isn’t yet noticeably eroding banks’ core business of making loans. The amount of lending done by peer-to-peer lenders, for example, remains minuscule. AI has, however, piled pressure on costs by automating mundane and repetitive tasks. The implication is that employees like the accountants singled out by Cryan as “doing work like robots” are living on borrowed time.
Deutsche’s whopping 86 percent cost-to-revenue ratio last quarter illustrates the problem. The CEO wants to get that down to 65 percent by 2020, in part by cutting 15,000 jobs. Rival Commerzbank is also purging staff, aiming to reduce its 80 percent efficiency ratio to roughly the same level as Deutsche’s target. Even this may not be enough. The median euro zone bank has a cost-to-revenue ratio of 58 percent, according to the latest European Central Bank data.
On average, expenses eat up 70 per cent of German banking revenues. In part, the country’s high banking costs are a consequence of its fragmented market – there are over 1,800 credit institutions – and numerous physical branches. Only 45 percent of Germans use online banking compared with nearly 80 percent of Swedes, according to a central bank survey. Technologically proficient Swedish banks, with efficiency ratios of around 50 percent, are among Europe’s most profitable lenders.
For massive Deutsche, with 1.6 trillion euros of assets, the revolution may happen slowly. Still, ING-DiBa, the online-focused German arm of Dutch lender ING, gives a glimpse of the future. Its expenses account for a mere 40 percent of the top line. The challenge for Cryan and his large-bank peers is to make their cost-cutting targets radical enough.
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