Profits Pressure

Gloom descends on Deutsche Bank's CEO

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A manager, not a magician: Deutsche Bank boss John Cryan. Source: Handelsblatt Global, DPA [M]

About a year ago, Deutsche Bank was on the ropes. Germany’s largest bank was reportedly on the hook for $14 billion (€11.8 billion) for questionable mortgage dealings in the United States – a titanic sum that would have sunk many a financial institution.

Hedge funds began to pull their business with Deutsche, the bank’s stock price fell to new lows and one prominent investor, the Hungarian-American magnate George Soros, was said to have asked: “Shouldn’t we call Angela Merkel?”

Fortunately for Deutsche, a year has gone by and collapse is no longer imminent. The bank negotiated a more favorable settlement with the US authorities and secured a sizeable capital increase, both of which gave it more wiggle room.

But rather than relief, many institutional investors feel deeply dissatisfied with the bank’s recent performance – and they’re blaming CEO John Cryan.

“The chairman had a favorable starting position in the spring, but he used it poorly,” one influential investor said. “I increasingly believe that he’s no longer the right man for the job.”

Another one of the bank’s top investors voiced similar doubts. “In the two years that he’s been at the helm, not enough has changed,” this investor said.

"I increasingly believe that he's no longer the right man for the job," said one influential investor.

Earlier this year, their concerns grew after Deutsche Bank presented weaker-than-expected results for the first half. Its managers prevented an exodus of investors but even so, revenues continued to decline, and the bank’s share price has continued to slip.

Deutsche Bank has refused to comment on investors’ obvious distrust of Mr. Cryan, except to say, rather blandly, that many people have praised his achievements as a reformer. That hasn’t stopped powerful investors from placing a question mark over Mr. Cryan’s future at the helm.

That includes members of Qatar’s ruling family, who hold a 9 percent stake in the bank. They are reportedly annoyed that Mr. Cryan does not seem content in his role as a temporary reformer. In an interview with Handelsblatt, Mr. Cryan said he was open to the possibility of extending his contract with the bank – making it sound as if it were his choice alone, rather than that of the board of directors.

Despite the criticism of Mr. Cryan, not everyone thinks he’s doing a bad job.

“We still think that John Cryan is the right man,” said Ingo Speich, a fund manager at Union Investment. “Compared to the situation a year ago, Deutsche Bank has become much more stable, costs and risks have decreased, there are fewer legal risks and its capital has been replenished.”

A manager is not a magician, Mr. Speich intimated, but even he noted that “the bank has not yet proven that its business model is sustainable.”

14 p26 Chronology of a Crisis-01

Mr. Cryan was upbeat after Deutsche’s settlement with US prosecutors, but that optimism wasn’t reflected in the bank’s fiscal performance.

“Our central areas of business are doing markedly better than last year,” Mr. Cryan said last February. Then in April, the CEO wrote: “Our customers are returning to us after last fall’s turbulence.”

However, in the first half of 2017, the bank’s revenue fell by 10 percent on the year to €14 billion. The bank earned more money, but thanks to cost-cutting measures and a diminished appetite for high-yield (and risky) investments. For many investors and analysts, the figures were a bitter disappointment.

Investors’ skepticism is reflected in the bank’s price-to-book value ratio, a measure that compares its stock price with its equity. For Deutsche, this ratio is 44 percent – below that of most European rivals. Even beleaguered Unicredit, the Italian bank and financial services provider, has a much higher ratio of 77 percent.

A low price-to-book ratio may indicate that investors fear hidden risks, expect weak returns – or distrust management.

“The stock price is so low because the market doesn’t trust Deutsche Bank can turn things around,” said one investor, who noted that the bank has been promising to change its strategy since 2012. “It’s not about lip service, but facts.”

A low price-to-book ratio may indicate that investors fear hidden risks, expect weak returns – or distrust management.

Deutsche Bank’s top executives are aware of the problem. They know they need to deliver, but there’s another problem: The financial markets seem to be against them.

Banks ranging from Citibank to JP Morgan and Goldman Sachs have all said that bond trading, normally a key profit source for financial institutions, has been stuck in the summer doldrums. This hasn’t exactly made things easier for Deutsche Bank.

Analysts aren’t getting their hopes up for the third quarter. On average, they expect the bank’s net profits to stagnate at €280 million. As for Deutsche’s revenues, experts forecast a further decline from €7.5 billion to €6.9 billion in the latest quarter.

The head of Deutsche Bank’s investment arm, Marcus Schenck, says the bank must first ensure its dominance in Germany, its core market, before attempting to recapture market share in Europe. Only then can it rebuild its relevance in the US, he said.

To date, Mr. Cryan has focussed on shoring up the bank’s image and identifying important investment needs. Deutsche’s board members agreed with that strategy, but like many critical shareholders, they too are wondering when the bank’s restructuring will begin to boost its bottom line.

 

Yasmin Osman, Michael Maisch and Daniel Schäfer reported for Handelsblatt from Frankfurt. Chris Cottrell and Jeremy Gray adapted this article for Handelsblatt Global. To contact the authors: m.maisch@handelsblatt.com,  d.schaefer@handelsblatt.com,  osman@handelsblatt.com

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