Deutsche Bank

A Housecleaning, From Top to Bottom

Mr. Cryan gets the Warhol treatment. Source: AFP [M]
Mr. Cryan gets the Warhol treatment.
  • Why it matters

    Why it matters

    Deutsche Bank’s new CEO, John Cryan, said he will look far and wide to boost efficiency at Deutsche Bank.

  • Facts

    Facts

    • Deutsche Bank said its earnings more than tripled to €818 million in the second quarter from €238 million a year ago.
    • Net revenue also rose by 17 percent to €9.2 billion, beating the consensus expectation of €8.7 billion from 15 bank analysts.
    • John Cryan became co-CEO in July and plans to announce further details of the bank’s restructuring plans in October.
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    Audio

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The new designated chief executive of Deutsche Bank, John Cryan, raised expectations on Thursday that he may pursue a more rigorous regime of cost-cutting and restructuring at Germany’s largest bank than previously announced.

In releasing upbeat second-quarter results that were weighed down by €1.2 billion in legal costs to the bank from April through June, John Cryan, a former UBS chief financial officer, signaled that he would look far and wide to cut costs and steer the bank to more sustainable profitability.

While the bank boosted revenue by 17 percent in the quarter, a sign of its “fundamental strengths,” Mr. Cryan said, he noted that Deutsche also faces significant challenges.

These are “evident in the unacceptably high level of our costs, our continuing burden of heavy litigation charges, a balance sheet that must be more efficient, and the poor overall returns to our shareholders,” Mr. Cryan wrote in a statement to shareholders.

Mr. Cryan, a U.K. native, took over on July 1 as co-chief executive of the Frankfurt-based bank, along with co-chief executive Jürgen Fitschen, who will leave management next spring, putting Mr. Cryan alone in charge. Mr. Fitschen’s former management partner, co-Chief Executive Anshu Jain, left the bank at the end of June after investors reacted coolly to the bank’s restructuring plans last spring.

That strategy included spinning off retail bank Postbank, closing some 200 branches in Germany, exiting 7-10 countries and cutting as much as €150 billion from its balance sheet in investment banking. Yet it underwhelmed most investors, who had hoped the bank would be even more ambitious in overhauling a business that has proved much more costly than many of its global peers.

While Mr. Cryan said he endorsed his predecessor’s restructuring plans in principle, he made clear in a conference call with analysts Thursday afternoon that nothing was off limits to him in his search for savings and efficiency. He promised to close any businesses, discontinue products and leave countries that have become “unattractive” to the bank.

“If you just take horizontal slices out of costs, you don’t get anywhere. You just irritate people,” he told analysts. “We are prepared to … give up on the optionality of holding lots and lots of businesses open.”

Mr. Cryan also acknowledged the impatience and skepticism of many shareholders and investors, who have heard chief executives of Deutsche Bank talk about implementing cost savings for much of the past decade.

“This is no longer about words, but deeds,” he said. “So while I ask for your patience … rest assured that we are already in implementation mode.”

“This is no longer about words, but deeds. So while I ask for your patience … rest assured that we are already in implementation mode.”

John Cryan, Deutsche Bank co-chief executive

Mr. Cryan will get some tailwind from the bank’s latest results: Second-quarter net income more than tripled from a year ago to €818 million and net revenue rose 17 percent to €9.2 billion, the bank reported. But soaring legal costs – a legacy of the 2008 financial crisis and the many legal cases pending against the bank – will be a challenge to Mr. Cryan in the coming months and years.

The increases in Deutsche Bank’s revenue and earnings were driven by gains in investment banking and asset management, and sent the bank’s share price up about 2 percent morning trading.

The share price continued rising as a confident-sounding Mr. Cryan spoke to investors for the first time in the afternoon, climbing 3.7 percent to €31.62 by 16:30 Central European Time.

Deutsche Bank’s earnings would have risen even more were it not for €1.2 billion in additional “litigation charges” – triple what the bank reported in the second quarter of last year and, according to chief financial officer Marcus Schenk, the result of settling mortgage-related disputes in the United States. The bank also still has €3.8 billion in legal provisions set aside for pending cases, and another €3.2 billion in “contingencies” that have yet to be booked.

The second quarter saw Deutsche Bank accept a $2.5-billion fine for its role in the Libor interest-rate manipulation scandal – more than any other bank was fined over Libor and more than Deutsche Bank had initially expected.

“The results are good if you strip out the legal provision,” Neil Smith, a banking analyst based in Düsseldorf for Germany’s Bankhaus Lampe, told Handelsblatt Global Edition. “The legal provision was larger than expected….this continues to be a little bit of a headwind for Deutsche Bank.”

Mr. Smith pointed to the results in investment banking and asset management, where net revenue rose 23 percent and 25 percent respectively, as the positive standouts in the April-June quarter of this year – divisions that probably benefited from a strengthening dollar and the high market volatility that has been seen due to the ongoing Greece crisis this year.

Mr. Cryan’s sober assessment of the results marked something of a change in tone from his more high-flying predecessor, giving some investors hope he means business when it comes to reforming the bank, which has struggled with uneven profits ever since the 2008 financial crisis and continues to be burdened with high costs.

 

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The bank’s costs indeed remain high, and its prospects for turning a profit are lower than many other global rivals. The bank reported a cost-income ratio of 85 percent, unchanged from last year and higher than many global banks, particularly in the United States, that have managed to bring that ratio below 80 percent.

The bank’s return on tangible equity, a measure of its profitability, rose from 2.1 percent to 5.7 percent on the quarter – another positive sign but well below its pledge to offer shareholders a return on equity of 10 percent or more in the coming years.

Mr. Cryan clearly has his work cut out for him, and is expected to take his time before deciding exactly how he wants to put his own imprint on the bank. He has promised to take a deep look at the bank’s operations in the coming months as he reviews a strategic overhaul of the bank’s operations that was put in place in April by his predecessors. He will announce his own findings by the end of October.

 

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Thursday marked the first public statement from Mr. Cryan, who will co-lead the bank with Mr. Fitschen until May of next year, after which he will become its sole chief executive.

Most analysts are already hopeful: The British banker developed a reputation as something of a turnaround specialist in his past job as chief financial officer of Swiss bank UBS.

“My feeling is he’s the right man for the job at this point in time,” said Mr. Smith of Bankhaus Lampe. “He has a proven track record of turning banks around in difficult situations, and an eye for detail which is exactly the right thing for Deutsche.”

Clearly, Mr. Cryan is already taking charge: While past earnings statements from Mr. Jain and Mr. Fitschen would be written jointly, there was no mention of Mr. Fitschen in Thursday’s release.

Still, Mr. Cryan, who is known to prefer working behind the scenes, has yet to give a speech in public or face the press. That may have to wait until he has a full plan in place in October.

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Christopher Cermak is an editor at Handelsblatt Global Edition in Berlin, focusing on the financial markets. He has also covered banks and the economy in Frankfurt and Washington DC. To contact the author: cermak@handelsblatt.com

This story was updated at 16:20 Central European Time with comments from a Deutsche Bank conference call.

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