Losing Focus?

Distractions Weigh on Deutsche

  • Why it matters

    Why it matters

    Germany’s biggest commercial bank, which has been struggling with litigation risks and sluggish earnings, is in the midst of a deep restructuring that some say is distracting it from its core business.

  • Facts

    Facts

    • A media report suggests that the head of investment and corporate banking, Jeff Urwin, is in talks to leave.
    • The bank last week posted a loss of €1.4 billion, or $1.5 billion, for 2016 and a 10 percent drop in revenue to €30 billion.
    • The bank’s asset management arm also faces uncertainty with plans for a partial sale and criticism of its new chief.
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    Audio

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main source imageBROKER Getty Images – Deutsche Bank head office Frankfurt downtown street 75489872
Deutsche Bank's head office in downtown Frankfurt may be too preoccupied with its own restructuring. Source: imageBROKER/Getty Images

At first sight, Jeff Urwin seems like a good fit for Deutsche Bank — not just because his second name, Herbert, sounds reassuringly German. The Brit is regarded as one of Wall Street’s most seasoned investment bankers.

After positions at Lehman Brothers, Bear Stearns and JP Morgan. Mr. Urwin joined Germany’s biggest commercial bank in 2015. For the past year has been on its management board, in charge of corporate and investment banking, a division his British chief executive, John Cryan, has high hopes for.

Nevertheless, Mr. Urwin and Deutsche Bank may part company. The Wall Street Journal reported this week that the manager was already in talks about leaving. Financial sources said that’s unlikely to happen in the short term. But for some time, there has been speculation that Mr. Urwin is tiring of his job, and some colleagues aren’t happy that he runs his division from New York while many of the bank’s big clients are in Europe.

“The bank must prove now that its business model works and that it can earn money despite the deep corporate restructuring.”

Deutsche Bank shareholder

Chief Financial Officer Marcus Schenck, an experienced investment banker, would be a possible successor if he wasn’t playing a key role in restructuring the bank.

Investors are worried about this uncertainty. The dismal annual results released last week fueled concern that the bank is so preoccupied with its reorganization that its core business is suffering, and market shares are shrinking.

Investment banking isn’t the only restless division. Trouble is also brewing at Deutsche Asset Management, where not everyone is happy with new chief Nicolas Moreau, who joined the management board last year.

Deutsche Bank’s results showed that the crisis of confidence it suffered last fall, when its share price sank to record lows following news of a big U.S. claim over alleged sales of toxic securities, has left deep scars.

The 2016 loss of €1.4 billion, or $1.5 billion, was largely due to fines paid for past scandals, but revenues also fell, by 10 percent to €30 billion. That reflected the turmoil Deutsche Bank went through last September when it even had to fend off speculation that it may need a government bailout.

Citibank analyst Andrew Coombs has calculated that Deutsche Bank made an operating loss of €300 million in the fourth quarter, far more than predicted.

“The bank must prove now that its business model works and that it can earn money despite the deep corporate restructuring,” said an influential investor.

118 Deutsche Bank – WTB 2016 – Neu 2017-02-02-01

To be sure, Mr. Cryan has the backing of Deutsche Bank’s most important shareholders for his restructuring. But there’s growing concern that the bank’s day-to-day business is suffering.

Mr. Cryan told a news conference revealing results last week that Deutsche Bank had an encouraging start in 2017. But that didn’t convince many analysts.

Mr. Coombs of Citibank praised the progress Deutsche has made in boosting its capital base. However he said he feared it has come at a high price, and at the expense of profitability in the core business.

James Chappell of Berenberg Bank said the bank had lost more market share than expected especially in its important securities trading business where it reported a loss of €737 million in the fourth quarter, while U.S. competitors profited from surging markets following Donald Trump’s election victory.

Mr. Coombs said Mr. Urwin’s corporate and investment banking division had also turned in a “weak” performance. Its pre-tax profit rose 17 percent to €1.7 billion last year but in the fourth quarter, it slipped 2 percent to €304 million.

Asset management made a €204 million loss last year due mainly to write-downs while investors withdrew €41 billion of the unit’s funds of more than €750 billion. Usually, the division is one of the bank’s reliable sources of profit, which is why Mr. Cryan is considering selling part of it through an initial public offering to reinforce the bank’s capital.

But the plan is causing concern among staff, and opinions are divided about the division’s new boss, Mr. Moreau. Even his critics can’t blame him for the fund outflows because he only moved to Deutsche Bank from French insurer Axa last October. But he faces similar accusations as Mr. Urwin, with some staff saying that his base in London is too far removed from the bulk of the business at a difficult time for the bank.

Some also have their doubts about his focus on passive investments such as exchange-traded funds that mostly track market indices. Until now, the business has been focused on actively managed funds.

Despite the criticism, Mr. Moreau has fans at the bank. Some colleagues say that the former insurance manager has a keen sense of what investors want, and that he bases his strategy on that. He’s also grasped the value of the brand and is ready to invest in it with a major marketing campaign, they said.

Investors say that more than anything else the bank needs a period of calm right now. “The bank has enough fires to put out, so turbulence in the management board is the last thing it needs,” said a big shareholder.

 

Michael Maisch is the deputy chief of Handelsblatt’s finance desk and based in Frankfurt, Germany’s financial capital. Ingo Narat is an editor with Handelsblatt’s finance section. To contact the authors: maisch@handelsblatt.com and narat@handelsblatt.com

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