Downgraded ambitions

78031994 Deutsche Bank towers
It's a long way back to the top. Source: DPA / Picture Alliance

It’s been just two weeks since rumors swirled that Deutsche Bank’s shareholders and supervisors were starting to lose patience with their chief executive, John Cryan. Those critics just got a bit more ammunition as ratings agency Fitch announced it was downgrading Germany’s largest bank from A- to BBB+, citing continued pressure on earnings and doubts about Mr. Cryan’s strategic plan.

“We no longer expect revenue to demonstrate any clear signs of franchise recovery this year and we expect necessary further restructuring costs to continue to erode net income,” said Fitch in a report released Thursday.

It was a troubling statement for a CEO who has repeatedly promised his bank has turned a corner since surviving what amounted to an existential crisis at this time last year. And it’s not as if Deutsche can point to a downturn in the wider industry. The bank was the only one of 12 international banks rated by the agency to be downgraded.

“There is massive concern about the situation. The board is a bit calmer than investors, but not much.”

Deutsche Bank source

Even among German institutions, Deutsche’s credit now ranks below DZ Bank as well as regional state-backed banks Helaba, LBBW and BayernLB. In Germany’s over-crowded banking sector, this could allow these gleeful rivals to steal away customers, according to Michael Bücker, head of corporate banking at Bayern LB: “The single-A rating is so important, you can’t imagine how much.”

And yet, sources in the financial industry claim the bank is relatively untroubled by the Fitch downgrade. Though it wouldn’t comment publicly on the news, bank officials believe the decision will not significantly drive up the bank’s finance costs and will leave customers untroubled. The bank points to a healthy equity ratio, now over 14 percent, as well as its solid finances and clear reductions in risk since 2007. Moreover, the downgrade still leaves the bank’s credit rating well within the “investment grade” category.

Fitch is following the lead of the other two major ratings agencies, suggests Ingo Frommen, an analyst with Landesbank Baden-Württemberg. “All the major agencies now have the bank’s bonds as triple-B. That is really not a good advertisement for a bank.” S&P and Moody’s still rate Deutsche’s debt at A, but its bonds have slid back to triple-B. And they could even fall further, said Mr. Frommen, noting that S&P still has a negative rating on the bank. “John Cryan has to regain investor confidence, and quickly,” he added.

The news comes at a bad time for Mr. Cryan. Debate at the bank’s annual strategy meeting for supervisory board members and top executives, held in Berlin in mid-September, is said to have been intense. The main question: how can the bank turn around its dreadful earnings situation. “There is massive concern about the situation. The board is a bit calmer than investors, but not much,” said a source close to the board. Mr. Cryan’s future was not on the agenda, but if results do not improve, it soon will be.

As if that weren’t enough, sources told Handelsblatt that European banking supervisors are stepping up their scrutiny of China’s HNA, one of Deutsche Bank’s largest shareholders, amid sudden changes in the Chinese conglomerates shareholder structure. HNA owns just under 10 percent of the bank.

02 Deutsche Bank – Disappointing Numbers-01

Mr. Cryan has bet the bank’s future, and his own, on his so-called Strategy 2020, announced two years ago. The plan involves large cuts in staffing and withdrawing from some markets and non-core business areas. This strategy was meant, above all, to improve the bank’s capital situation and repair its battered return on equity.

But results have remained disappointing and Fitch, like the other rating agencies and investors, are convinced they will stay that way. Earnings in the first half of 2017 fell 10 percent to €14 billion, around $16.5 billion. This month’s third quarter figures will not please investors either: analysts expect a profit of €263 million, down substantially on last year. Predictions of earnings foresee a drop from €7.5 to €6.9 billion.

And despite Mr. Cryan’s efforts, legal problems continue to weigh on the bank, which recently settled with US authorities for $190 million after accusations of currency manipulation (though it wasn’t the biggest offender in this case). All this is hitting Deutsche’s share price: down 5 percent since January, the worst performance among major European banks.

Despite the bank’s many problems, some major investors are sticking by Mr. Cryan. “We still think he is the right person to turn the bank around,” said one influential shareholder. So far, the supervisory board has also remained loyal to the 56-year-old chief executive, who may just have the toughest job in the business. “He’s doing a really great job,” said one board member.

Mr. Cryan still has a massive to-do list, but seems likely to keep at least one promise: taking the bank back into the black in 2017. On average, analysts predict a net profit of €1.2 billion this year, with none predicting a loss. Some small good news for Mr. Cryan, but if there are more setbacks, his own position may not be secure.

Yasmin Osman is a financial editor with Handelsblatt’s banking team, Andreas Kröner covers Deutsche Bank and the wider banking sector,  Andrea Cünnen covers financial markets and smaller banks and Michael Maisch is deputy editor of Handelsblatt’s finance section. Brían Hanrahan adapted this story for Handelsblatt Global. To contact the authors:

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