Damage Limitation

Time For Cryan to Deliver

Deutsche Bank CEO John Cryan gestures at a news conference in Zurich, Switzerland, in this February 10, 2009 file photo. Deutsche Bank will report a record pre-tax loss of 6 billion euros ($6.7 billion) in the third quarter and will cut or skip dividend payments for 2015, it said late on Wednesday. REUTERS/Christian Hartmann TPX IMAGES OF THE DAY
John Cryan has a lot to think about in 2016.
  • Why it matters

    Why it matters

    Deutsche Bank chief John Cryan is struggling to persuade investors that his restructuring plans will pay off.

  • Facts

    Facts

    • Deutsche Bank said it lost nearly €7 billion last year, sending its shares sliding nearly 10 percent.
    • Trade union representatives are jittery ahead of restructuring, which will likely include 200 branch closures and 9,000 job cuts.
    • Deutsche Bank is expected to float at least some of its retail subsidiary Postbank in 2016, but may face steep losses in the process.
  • Audio

    Audio

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John Cryan took his place at the podium in the conference center in Davos at 4.15 p.m. on the dot on Wednesday, only to find that World Economic Forum discussions were delayed.

For about five minutes Mr. Cryan, Germany’s most powerful banker, waited without uttering a word to his neighbors, IMF head Christine Lagarde and PayPal chief Dan Schulman. Germany’s most powerful banker only came to life when the debate kicked off, calmly offering his take on the banking world.

His performance matched the British banker’s reputation after some six months at the top of Deutsche Bank. Mr. Cryan is not a man of grand words and big gestures. Those who deal with him praise his expertise and meticulous knowledge, but he remains aloof and introverted.

He does not play the zappy hero, like Josef Ackermann, who was at the bank’s helm from 2002 to 2012, or as a wily financial markets whizz kid, like Anshu Jain, who was co-chief from 2012 to 2015. In fact, Mr. Cryan is the antithesis of charismatic, with a deeply furrowed brow that reveals the pressures of the industry’s top job. He does not try to sugarcoat anything; he focuses on the facts. With characteristic consistency he analyzes, calculates and processes.

Mr. Cryan did not mastermind these changes but is simply implementing his predecessors’ plans.

Mr. Cryan has ushered in a new mood and a new approach at Deutsche Bank, whose confidence once bordered on arrogance. Under his leadership, the bank is going through what is probably the most profound and certainly the most painful transition in its recent history.

Above all, this involves cuts: The bank is disposing of subsidiaries and customers, closing some sites and activities and shedding 9,000 jobs. Its employees have been forced to recognize that they no longer rank among the global elite, the winners of the financial crisis, but instead are part of a massive restructuring project, the outcome of which remains up in the air.

Mr. Cryan did not mastermind these changes but is simply implementing his predecessors’ plans. Under pressure from Paul Achleitner, chairman of Deutsche Bank’s supervisory board, Mr. Jain and his co-chief Jürgen Fitschen realized too late that the bank had bitten off more than it could chew by leaving its structure largely unchanged following the financial crisis.

And the new chief now has to make up for lost time and downsize its operations. Mr Cryan has a proven track record as chief financial officer of Swiss bank UBS, which has found its feet again after being hit hard by the financial crisis. Analysts, regulators and even most of Deutsche Bank’s employees believe that this is the right strategy, that it is overdue and that there is no alternative.

But the road ahead is rocky. A big shake-up is unavoidable but the future remains unclear. Many employees have spent their entire career at the bank, confident that there was no better employer in Germany. But they are now left wondering what their Deutsche Bank will look like once the revamp is over.

Those in charge are aware that it is a big ask, but say their new management needs time and trust. Senior sources at the bank say it went off track focusing on growth, providing excessive rewards for staff who generated profits and lost sight of its solid base. Until the new pragmatism has taken hold, they say everyone will have to suffer a lean period. Ultimately, however, they argue that any doubts about the future business model are unfounded.

Sources stress that the bank will prove itself through its quality; with its experience and its deep understanding of global capital markets, it will continue to offer a European alternative to the dominant U.S. banks in future. The bank will fill a niche doing business with large companies and investors, they say, leaving its competitors behind.

However, many rivals have been undertaking cuts and reforms like those getting into gear at Deutsche Bank. They are now poised to attack, and are nabbing market share from Deutsche Bank and wooing away its best employees.

A high-ranking investment banker at a rival institution drew a parallel with the board game Monopoly: Deutsche Bank is still sorting out its streets while its competitors are building hotels.

In the game, this is usually the point when everything goes downhill, and things certainly seem to be going from bad to worse at Deutsche Bank. Its share price has plunged to levels last seen at the height of the financial crisis. Deutsche Bank is currently worth about €25 billion ($27 billion), less than half the value of European rivals such as France’s BNP Paribas and Switzerland’s UBS and a long way from U.S. competitors such as JP Morgan, which has a stock market value of almost €200 billion.

Sources at the bank say they understand investors’ skepticism, as the market awaits any measurable results from restructuring. Speaking to analysts, Mr. Cryan admitted that the bank has pledged too much and kept too few of its promises in the past. Costs were too high, pay too generous, controls too lax and the IT systems out of date, he says.

Mr. Cryan wants to send out the message that he has identified all the bank’s problems and is dealing with them decisively. He spares no one in his analyses, not even co-CEO Jürgen Fitschen, who is due to step down in May and who co-presented the bank’s 2015 results.

Late on Wednesday, the bank rattled investors with news it expected a net loss of about €6.7 billion, its biggest loss ever, hurt by writedowns, litigation charges and restructuring costs as well as punishing business conditions in the fourth quarter.

G S06 Deutsche Bank Kurs TTgrafik
Deutsche Bank’s share price has been on a roller coaster journey in the past nine years. Source: DPA/Bloomberg

 

Already Mr. Cryan has forewarned shareholders that there is unlikely to be a dividend in 2016 and 2017, and many doubt that things will improve after that. One fund manager says Mr. Cryan is “attempting to turn around an oil tanker,” adding that this will take some time.

Laurie Mayers, a banking expert at rating agency Moody’s, says that the biggest obstacles are structural problems with profitability in the capital markets and retail banking business. Meanwhile, some investors are running out of patience.

“Mr. Cryan still hasn’t plausibly demonstrated where he plans to earn money in future,” said a senior manager at a major investment company, who asked not to be identified.

Another suggested that Deutsche Bank should at least consider a merger with another bank, adding that troubled Swiss rival Credit Suisse, which is going through a similarly rigorous restructuring program, could be a candidate. Unlike Deutsche Bank, the Swiss bank has obtained fresh capital from investors for this.

This is one step that Mr. Cryan and CFO Marcus Schenck want to avoid at all costs. Deutsche Bank has already collected almost €22 billion from capital increases over the last five years, but instead of investing these funds in growth as promised, it used them to settle legal disputes and strengthen the bank’s capital base.

Mr. Cryan has stated that a further capital increase is not necessary at present, but has not actually ruled one out. Given the risks the bank faces, Mr Cryan needs to keep his options open. Deutsche Bank is embroiled in around 6,000 court cases, the outcome of which is uncertain.

The bank has spent €11.2 billion since 2012 on settling disputes and has set aside a further €4.8 billion, but it is impossible to predict whether these provisions will be sufficient. One investor has warned that the bank is “toxic.”

While regulators have completed their investigations into rigging of the Libor reference rate, a number of civil suits are still awaiting a verdict. The risks arising from a Russian money-laundering scandal are incalculable.

Authorities in the United States, United Kingdom and Germany are also investigating errors in the organization of business processes and possible violations of sanctions. As there are no precedents, it is not known how high potential penalties might be.

The bank can take solace from the fact that it has now halted these activities and has cooperated with investigations, replacing almost its entire management board. One of the main causes of the bank’s current difficulties is that the old management underestimated the determination of the regulators. Mr. Jain and Mr. Fitschen were not prepared for the drastic tightening of capital requirements.

Another major step on the cards is the spin-off of Postbank, a retail bank. Mr. Cryan argues the bank will have better prospects outside Deutsche Bank, as capital requirements are less stringent for smaller institutions.

However, some sources with intimate knowledge of Deutsche Bank express doubt whether this split is really necessary. The retail banking business including Postbank is performing well. In the first half of 2015, the subsidiary achieved a pre-tax profit of around €1 billion, one of its best ever results. Although the investment bank recorded a profit of €1.8 billion in the same period, this area of business tied up more than three times as much capital.

At least some parts of Postbank are expected to float on the stock market in 2016. But the current climate for initial public offerings is unfavorable. The stock market is fluctuating, and low base rates are weighing on the earnings of banks that depend on the margin between interest on deposits and on loans. Senior bankers at rival institutions remain skeptical about its plans, and there are no signs of a buyer.

Even if an IPO goes ahead, Deutsche Bank could be faced with losses. If Postbank is valued at a similar level to its parent group, it would be worth barely more than €2 billion. Sources close to the bank say it will probably be viewed in a more positive light as it is not involved in as many lawsuits.

However, no investor sees scope for a pricetag of more than €3 billion. Deutsche Bank, however, currently values Postbank at around €4 billion and had listed the subsidiary on its accounts at about €6 billion at the beginning of 2015, meaning it would have to write off the difference.

Some people at the bank believe that this sudden slide in value could harm Mr. Cryan. Prior to becoming its chief, he was a member of the supervisory board and acted as chairman of the audit committee, whose most important task is to approve the annual financial statements.

Mr. Cryan gave the valuation his approval, but just a few months later revised it drastically downwards. One high-ranking bank manager pointed out that the value of Postbank did not drop by a third overnight, adding that an explanation is required.

 

Deutsche Bank in Figures-01

 

Employees of Postbank, who mostly want to become independent, also demand clarity. They can expect to be spared drastic cuts, unlike their colleagues at Deutsche Bank, where retail business is expected to be hardest hit, taking 4,000 of the 9,000 job cuts.

Staff appreciate the bank’s new brand of straight talking, which contrasts with the widening discrepancy between official statements and reality under the leadership of Mr. Jain and Mr. Fitschen. Fear and insecurity are nevertheless rife, with hundreds of Deutsche Bank employees joining trade unions and employee representatives collecting more than 10,000 signatures to protest against cuts that they feel are too extreme.

Stephan Szukalski, chairman of trade union DBV, which has a strong presence at Deutsche Bank, is calling for hard facts, complaining that staff are unsure which branches will close, how many jobs will be axed and under what conditions.

Christian Sewing, who took over as head of the bank’s retail business in July, is currently touring Germany to explain that the segment will remain an important pillar of the bank’s business, despite job cuts and plans to close about 200 branches. His line is that the restructuring program is not primarily aiming to shrink costs, but rather reflects its bid to adapt to changes in customer behavior and market conditions.

But it will not be easy for him to argue this, as size is generally vital for retail banking success. The bank insists it will have an adequate foothold with 500 rather than 700 branches and 13 million customers.

In particular, it hopes that by boosting its investment in digitalization to the tune of more than €500 million, it will win over the skeptics. The bank plans to offer more advice via video links, for example, while standard products for customers will be processed more quickly and using digital technology.

When it comes to advice, the bank wants to home in on small and medium-sized companies and on its affluent customers who generate more income. An internal document is reported to have set a limit at a net household income of €4,500.

Business with securities is also expected to grow, a remit where the bank believes it has a significant edge over competitors. In the future, each branch will house an advisor for well-heeled clients. Mr. Sewing will continue to head up business with very wealthy customers in future, a sign of his emphasis on this area of business.

Despite this, unease is in the air, even in the banks higher-end business. For example, employees at the Cologne-based private bank Sal. Oppenheim, which was acquired by Deutsche Bank in 2010, are fearful it may not survive the planned cuts.

Deutsche Bank says its brand’s presence in business with wealthy investors must be carefully reviewed. This does not smack of good news. One member of Oppenheim’s board has already resigned, while other senior managers are said to be preparing to jump.

Similar fears swirl in many parts of the bank. Recruitment consultants say they are frequently contacted by Deutsche Bank employees. While many German staff members appear to be staying loyal and mainly want to safeguard their futures, the bank runs a risk of shedding top employees at its international sites, places where Deutsche Bank is just one institution among many.

This is particularly true of the investment bank’s headquarters in London, where hundreds of jobs are likely to go. Some bankers pre-empting this have already left, while others are said to be gearing up to quit, even before their annual bonus payouts. High-profile specialists are being wooed away by strong U.S. competitors.

Senior bank sources say this is to some extent unavoidable as the bank’s staff is destined to shrink. However, competitors report that Deutsche Bank is paying bonuses to particularly important individuals to keep them on board. Bonuses overall, however, are expected to sink.

According to current reports, they may be around 30 percent lower than last year, when the entire bonus pot amounted to €2.7 billion. And straight-talking Mr. Cryan has made it clear that he considers bankers are paid over the odds in general. During a speech in Frankfurt, he stressed, in his characteristically business-like fashion, that earning more would not make him work more, a message that everyone believes.

 

This article was originally published in German business magazine WirtschaftsWoche. To contact the authors: online@wiwo.de

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