Corporate Restructuring

Deutsche Bank to world: Trust us

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As it retrenches and restructures, Deutsche Bank is flying the flag in fewer places. Source: Reuters

True to its name, Deutsche Bank, the “German Bank,” is undergoing a fundamental restructuring – in a very German manner. It has a plan, it is a good plan, and it will be methodically executed, step by plodding step. And no one can tell them anything different.

“We have to do what we consider to be right for the bank in the long term,” Marcus Schenck, co-head of Deutsche’s corporate and investment bank (CIB), said in an interview. “Our task is not to maximize results on a short-term basis of one or two quarters.”

That’s absolutely right, agreed Garth Ritchie, his colleague at the head of CIB. “If we see our strategy through consistently, shareholders will also reward this,” Mr. Ritchie said in the first joint interview of the two managers since they were put in charge of the division in July. “Perhaps only after a slight time lag, but we are not going to take a supposed shortcut that is going to deflect us from the right path.”

Their message for investors, clients, partners: Be patient. How patient? Just two or three years – if all goes according to plan, if markets cooperate, if enough talented people are willing to go through some hard years with little or no bonus.

“In the past year we missed out on some mandates from corporate clients. It will take some time with advisory services for large corporate clients.”

Marcus Schenck, Co-head corporate and investment bank, Deutsche Bank

Just a year ago, Germany’s largest bank seemed on the verge of implosion after being rocked by scandals that cost it more than $10 billion (€8.4 billion) in fines and settlements for multiple instances of fraud, price manipulation, money laundering and sanctions violations. One whistleblower in the bank, risk analyst Eric Ben-Artzi, told New Yorker writer Ed Caesar last year that there was “cultural criminality” at the bank. “Deutsche Bank was structurally designed by management to allow corrupt individuals to commit fraud,” he said.

Regaining trust after reputational damage like that has been hard. “In the past year we missed out on some mandates from corporate clients that we might otherwise have been awarded,” Mr. Schenck acknowledged. “It will take some time with advisory services for large corporate clients.”

Low market volatility and strategic decisions to pull out of some businesses have exacerbated the decline in revenues, according to the two managers. After paying heavy fines in the US to settle charges of fraudulent mortgage securities, Deutsche now stays away from securitized assets and derivatives such as credit default swaps. Internationally, the bank is focused on Europe, the US, and Asia-Pacific and has curtailed its activities in Latin America.

“Moreover, part of the contraction in our business is due to the fact that we have reduced our risk appetite,” said Mr. Ritchie. “In transaction banking in particular, we have exited some countries and sectors and we have severed links with some clients.”

The goal for the division is to obtain the 8 to 12 percent return on capital, comparable to other players in the industry. But the two managers readily acknowledge they are still far from even the lower end of that range. “That is true, our costs are still too high, even though our cost-cutting program is already bearing fruit,” Mr. Schenck said. “And we have to win back market share. The division needs to generate higher profits.”

“You can also look at it as a kind of compliment. The competition likes to poach the people that we hired and trained up. ”

Garth Ritchie, Co-head corporate and investment bank, Deutsche Bank

Once upon a time, Deutsche Bank dominated every business it was in. Foreign trade credits, corporate banking, securities underwriting and trading, foreign exchange, high-end retail banking – these were its strengths through most of its history when it focused on the German market.

When globalization first took hold in the 1970s in the form of a flourishing market in eurobonds (bonds denominated in a currency outside the country of origin) and syndicated loans, Deutsche was a champion, ranking high on the league tables due to its enormous placing power – stuffing the portfolios of its investment funds, private clients and its own books.

But the bank wanted to be right up there with J.P. Morgan, Citibank, and Goldman Sachs as an international player. It bought the British merchant bank Morgan Grenfell in 1989, hoping to acquire with it that “Anglo-Saxon” knack for wheeling and dealing. It got the wheeling and dealing, all right, but without being able to install the proper controls to prevent abuse. The bank’s loss of self-esteem was evident in its hiring of foreigners as chief executives and no longer automatically promoting its chief executive to board chairman. (For that matter, the current CEO, John Cryan, is British and Mr. Ritchie himself is South African.)

The domestic market now is much different than the one Deutsche more or less abandoned in its international quest. Even the small and medium-sized companies that form the backbone of the German economy have more diverse needs.  “In the past he only required loans,” Mr. Schenck said of one SME owner he talked to recently. “Now he also obtains financing via the capital market and he wants to hedge his currency and interest rate risks.”

To keep customers like this happy, Deutsche needs to have the full panoply of trading activities to provide the necessary products on a competitive basis. This is a challenging task in the best of circumstance, but Deutsche also has to deal with defections of talented employees looking for greener pastures.

“You can also look at it as a kind of compliment,” said Mr. Ritchie. “The competition likes to poach the people that we hired and trained up.” But Deutsche is working hard to retain these employees, he acknowledges. At the same time, Mr. Ritchie adds, the bank is able to attract good people who think Deutsche has “upside potential.”

That may be true. Deutsche, so near rock bottom in many respects, has nowhere to go but up. When asked for his elevator pitch regarding the bank, Mr. Schenck responded that as far as CIB is concerned “we want to be the leading European investment bank that is globally competitive, founded on a very strong, well-anchored and profitable position in our home market of Germany.”

It could indeed take some time to get to that point from where they are now. The open question is whether time will stand still for Deutsche’s competitors as the bank works through its grand restructuring.

Handelsblatt reporters Yasmin Osman and Michael Maisch conducted the interview in Frankfurt. Washington, DC-based Darrell Delamaide adapted it into an article for Handelsblatt Global. To contact the author: d.delamaide@extern.handelsblatt.com.

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