Gold Silver Reports (GSR) – Deutsche Bank Taps the Brakes on Its Global Ambitions – It’s been reorganized and recapitalized, refocused and rebooted. For the better part of a decade, Deutsche Bank AG has been trying to retool itself for a tamer era of more regulation and less risk-taking. Now, as Germany’s biggest lender installs yet another chief executive officer, it’s facing the same old existential question: Should it focus more on rebuilding its domestic banking franchises, rather than continue trying to be Europe’s world-beating answer to Goldman Sachs Group Inc.?
Shareholders have been waiting years for Deutsche Bank to figure out what kind of bank it wants to be. Its European rivals have emerged from the post-crisis gloom poised to reap the benefits of a growing economy. France’s BNP Paribas SA said in February it may beat its profitability target in 2020 thanks to rising loan volumes in its home market. Swiss banking giants UBS Group AG and Credit Suisse Group AG have refocused on wealth management. And in Italy, the shares of top lender UniCredit SpA have returned about 25 percent in the last 12 months. Over the same period, the Euro Stoxx Banks Index has risen modestly—and Deutsche Bank shares are down about 25 percent.
The latest turmoil follows a drop in revenue in the final months of last year and a surprise decision to postpone a cost-cutting goal. Chairman Paul Achleitner and his fellow board members decided to oust British CEO John Cryan after less than three years and replace him with Christian Sewing, 47, a Deutsche Bank lifer. At the same time, Marcus Schenck, the deputy CEO in charge of the corporate and investment bank—and a onetime heir apparent to Cryan—quit the company.
Sewing is a lanky German who commutes to the Frankfurt headquarters from a small city close to where he grew up. He’s been a deputy CEO and managed consumer banking operations. His selection is being read in Germany as a sign that Deutsche Bank will be less ambitious in international investment banking. A shift was already under way: A review of the investment bank, known internally as Project Colombo, is supposed to determine which businesses to cut and which to support. But the sudden change at the top doesn’t solve a basic conundrum for Deutsche Bank. Much as it might like to refocus and slash costs, the corporate and investment bank accounts for more than half of revenue.
Sewing has said investment banking is still important for Deutsche Bank, and Germany’s finance minister, Olaf Scholz, told reporters after an April 11 cabinet meeting that the country needs a bank that’s a global player. Many are watching the U.S. investment banking operations, which accounted for 35 percent of the division’s €14.2 billion ($17.6 billion) in global revenue in 2017 and has been cited by analysts as ripe for restructuring. “The U.S. investment bank has to be refocused,” says Ingo Speich, a portfolio manager at Union Investment Privatfonds GmbH in Frankfurt, which holds shares in Deutsche Bank.
Achleitner said in a statement that Cryan had failed to move quickly enough in executing the turnaround. But Cryan did make progress on key features of his plan. In December 2016 he settled a toxic mortgage case in the U.S. for $7.2 billion. It could have been much worse. The U.S. Department of Justice had initially asked for $14 billion—a number big enough to push the bank’s share price to a record low and trigger an exodus of client money. The lower settlement paved the way toward better relations with American and German regulators and buoyed the beleaguered stock price.
Cryan raised €8 billion in a share sale early last year and spun off the bank’s asset management unit in March. In jettisoning Cryan so unceremoniously, Achleitner appears to be consolidating power. Not all investors are happy to see that. “It’s deeply troubling,” says Barrington Pitt Miller, a portfolio manager with Janus Henderson Group Plc, an investment firm that holds shares in Deutsche Bank. “The strategy under the chairman has not worked.” Deutsche Bank’s stock has fallen sharply during his tenure.
Anxiety is mounting within the investment bank as well. In March, Deutsche Bank ended a two-year bonus drought by making €2.2 billion in payouts to lift morale at the division. Now the ascension of Sewing, who’s an unknown within the securities unit, has investment bankers and traders outside Germany feeling wary, says a person who works at the division and asked not to be identified. With the new CEO vowing to pull back from unprofitable areas and pledging to never miss a cost-cutting target, more turmoil and slimmer bonuses seem likely, the person says.
Davide Serra, CEO of Algebris Investments, said on Bloomberg TV just prior to Cryan’s ouster that Deutsche Bank has to accept that it can’t compete with the big Wall Street firms in the U.S. and needs to shrink its cost base and focus closer to home. Deutsche Bank could free up €7 billion in equity by retreating from businesses in the U.S. such as interest rates and equities, JPMorgan Chase & Co. analysts said in a report sent to investors on April 11.
Unlike some peers, Deutsche Bank can’t fall back on a domestic bank generating big profits. The German retail banking industry is a patchwork of state-owned regional lenders, mutualized credit providers, and commercial banks, all of which eke out earnings in a country that largely shuns debt. That’s why Deutsche Bank, back in the 1990s, looked beyond its role as a handmaiden for German industry and became a force in global investment banking. By making acquisitions and poaching talent on Wall Street and in London, Deutsche Bank did crack the top tier, notably in fixed-income markets. Yet the institution’s swashbuckling ways led to a spate of legal scandals.
Now Achleitner is trying to bring the institution full circle. In 2016 he and Cryan launched an initiative dubbed Project Oak Tree—the company seems to like code names—to win more lending and underwriting business from German companies and expand its Deutsche Postbank franchise in the country. “The bank is now more strongly led from Germany,” Achleitner told the German media. “That is important for the day-to-day operations.”
Sewing will confront some big internal management challenges. Long composed of quasi-independent fiefdoms with disparate information-technology setups, the bank has been struggling to simplify its unwieldy systems. Sewing also inherits a five-year turnaround plan unveiled by Cryan in late 2015 that’s undergone several revisions. The new CEO will now be under pressure to clarify to the market the bank’s strategic goals.
Sewing and Achleitner might need something neither can control: luck. In part because of market conditions, revenue has fallen in 8 of the 10 quarters since Cryan took the helm in July 2015. But rising rates and volatility in the markets, which has stormed back amid fears of a trade war, may drive more customers to seek out Deutsche Bank’s services. Given the lender’s struggles, that could be just what Sewing needs to buy time that Cryan didn’t have and bolster Deutsche Bank’s fortunes. – Neal Bhai Reports (NBR)
