When Deutsche Bank announced last June that John Cryan, a British banker from UBS, would be replacing Anshu Jain and his co-chief executive at the helm of Germany’s largest bank, investors had great expectations. Shares in Deutsche Bank jumped 8 percent on the news alone. But the euphoria didn’t last.
There are many reasons why the honeymoon ended so soon.
Some have to do with structural issues affecting all of Europe’s financial sector. It is not only Deutsche Bank that has had to cope with increasingly tough post-financial crisis regulation and near-zero interest rates.
Mr. Cryan faces a long to-do list. That puts him in a position similar to his banking industry peers, Tidjane Thiam of Credit Suisse and James Staley of Barclays.
They, too, took over financial institutions in 2015, and each faces an equally tough reconstruction task as Mr. Cryan does.
So far, the going has been rough for all three. The stock prices of Credit Suisse and Barclays have fallen 15 percent and 18 percent, respectively, under their new bosses. Those results are not exactly brilliant, but they look good compared with the 24-percent decline at Deutsche Bank since Mr. Cryan took over.
“Because the dividend was canceled, the stock is no longer attractive to the typical private investor.”
That number is a warning sign for Deutsche Bank, and for Mr. Cryan. Basically, investors still have not bought into his plan to save the bank, which has struggled to emerge from the financial crisis and now faces a tough austerity cure ordered by the new chief executive.
At the end of last year, Deutsche Bank shares were trading at just over half of the bank’s book value, a sobering assessment of Mr. Cryan’s efforts so far. Many investor fears the austerity plans will be insufficient and the bank will still need fresh capital.
By 2018, Mr. Cryan wants to achieve a core capital ratio, a measure of equity capital and reserves against risk-weighted assets, of 12.5 percent.
But a big unquantifiable risk factor here are legal risks. Since 2012, various scandals have cost the German bank more than €11 billion ($12 billion), almost as much as the last two capital increases combined. Currently, the bank has €4.8 billion set aside to cover legal risks, but with the mirror-trade money laundering scandal in Russia, a new potential liability has emerged, whose costs can’t be foreseen.
Mr Cryan now says he will suspend dividend payments for two years. He wants to avoid another recapitalization if possible and several analysts have reacted positively. This month alone, three experts have raised investment recommendations for Deutsche Bank. But not everyone has been placated. Citigroup still fears Mr. Cryan will ask shareholders for more cash this year.
In principle, Mr. Cryan has already made it clear that he wants to put Deutsche Bank back on his feet. The bank can’t continue to be everything to everyone around the globe, as it attempted under Mr. Jain and the bank’s co-chief executive, Jürgen Fitschen. So the institution is pulling out of ten countries and focusing on its most profitable arm, investment banking.
In the future, Deutsche Bank will concentrate more on corporate customers and less on retail banking.
The bank intends to reduce the capital-intensive, and therefore, expensive securities business by €70 billion ($76.4 billion), or 9 percent. Many investors are wondering, however, whether Mr. Cryan can successfully scale back the bank’s operations without compromising profitability. And, securities trading had always been Deutsche Bank’s traditional strength.
To raise its leverage ratio, the ratio of equity to total assets, Deutsche Bank will have to shrink operations.
To that end, Mr Cryan’s predecessor had already announced plans to sell Postbank in part or as a whole. Postbank, the Bonn-based retail bank chain located in many of the nation’s post offices, has become a ball and chain for Germany’s biggest financial institution. The bank must sell a majority stake in the subsidiary, preferably through an initial public offering. A sale to an investor is also an option.
Mr. Jain had left the exact timing for a Postbank sale open when he departed in the middle of last year. In the investor presentation, he had announced that Deutsche Bank wanted to “bring the first installment to the market by the end of 2016.” Chief Financial Officer Stefan Krause said at the same conference that the hope was to de-consolidate Postbank “relatively quickly within the next two years.”
Indeed, at the time, Deutsche Bank published a press release announcing its intention to complete this step by the end of 2016. Some have now been surprised by reports that Deutsche Bank will bring less than 50 percent of Postbank shares to the stock exchange this year. Investors are criticizing the bank, saying unless they correct this contradiction they risk fueling false expectations.
The most important thing for Mr. Cryan is that he manages to sell a significant stake in Postbank this year. In view of current stock market turbulence and low interest rates, that’s not going to be easy.
Mr. Cryan has come in with an eye to where to trim fat. He openly criticized Deutsche Bank’s efficiency when he took over. Critics are prophesying that Mr. Cryan’s turnaround program, dubbed “Strategy 2020,” consists mainly of cost-cutting and little else, especially vision. The blueprint calls for 9,000 employees to be let go and 200 branches to be closed.
As of 2018, Mr. Cryan wants Deutsche Bank to be spending no more than 70 cents to earn each euro. The bank is on track to make a loss this year, so he’s got a hard road ahead, especially when analysts are calculating that by 2017 outgoings per euro earned will be around 78 cents.
Big questions remain as to how Mr. Cryan will cut costs and simultaneously grow revenues, as well as the new foundations of the bank built around investment and transaction banking as well as asset management. Even so, analysts are estimating a €2 billion ($2.2 billion) decline in revenue annually. The target return on equity of more than 10 per cent by 2018 is ambitious considering an expected return of just 5.7 percent in 2017.
Until Mr. Cryan begins to answer those questions, Deutsche Bank investors may continue to withhold their trust, and the bank’s share price could continue to decline. That could make Mr. Cryan’s job all that much more difficult.
Laura de la Motte is a Handelsblatt editor who covers finance and banking. Michael Maisch is the deputy head of Handelsblatt’s finance section in Frankfurt. To reach the authors: firstname.lastname@example.org and email@example.com