GLobal Exit

Deutsche Bank Leaves Russia

Old torn moscow pic ullstein bild
Bye bye Moscow?
  • Why it matters

    Why it matters

    Deutsche Bank’s partial withdrawal from Russia marks a shift from a global strategy to focusing on the regions Asia, North America and Europe.

  • Facts

    Facts

    • The bank plans to cut ties with 90 percent of its investment banking customers in Russia, Handelsblatt has learned.
    • New co-Chief Executive John Cryan is conducting a strategic review under which Deutsche will also withdraw from Denmark, Finland, Malta, New Zealand, Norway and Peru. It also plans to sell its stake in Chinese bank Hua-Xia and to pull out of retail banking in India.
    • Deutsche Bank also announced that Richard Meddings, the former finance director of British bank Standard Chartered, will join its supervisory board.
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John Cryan’s reorganization of Deutsche Bank is gathering steam. The new chief executive of Germany’s largest bank plans to shut down most of its business operations in Russia, where the bank is embroiled in a major new scandal.

Deutsche Bank itself and a number of national banking authorities, including the U.S. Department of Justice, are investigating accusations that staff members helped customers to launder money between Moscow and London.

The investigation could prove extremely costly, and it seems some consequences have already been drawn. The bank plans to cut ties with 90 percent of its investment banking customers in the country, Handelsblatt has learned. These include banking clients with which the bank has had long-standing business ties. It is unclear what will happen with the remaining customers.

The partial withdrawal from Russia hasn’t yet been formally decided though, the sources said. Deutsche Bank’s smaller dealings in asset management and with business loans in the country will reportedly remain intact.

Deutsche Bank declined to comment. It reiterated that Mr. Cryan, who became co-chief executive in July, will announce details of the new strategy at the end of October. The Reuters news agency has also reported about the partial pullout from Russia.

The latest development comes as the bank is refocusing its operations on what is most profitable, moving away from global banking to concentrate on investment banking in the regions of Asia, North America and Europe.

A more dramatic pullout of retail banking is also underway, with plans to withdraw from Denmark, Finland, Malta, New Zealand, Norway and Peru. The bank also plans to sell its stake in Chinese bank Hua-Xia and to pull out of retail banking in India, while spinning off its domestic retail subsidiary Postbank and cutting about 200 branches in Germany.

Thousands of job cuts could be in the offing as a result – and the vast majority of them outside Germany – though sources said that nothing has been formally decided.

The fear at Frankfurt’s headquarters in Frankfurt, however, was palpable on Tuesday: “There were many discussions, but nobody knows what’s happening,” said one member of the bank’s worker’s council.

A restructuring of the bank’s operations had already been announced in April by Mr. Cryan’s predecessors, Anshu Jain and Jürgen Fitschen, though the lack of detail at the time frustrated investors who demanded a more aggressive plan from the bank to restore profits that have lagged behind rivals since the 2008 crisis.

On taking office in July, Mr. Cryan said he would take his time to carefully review the bank’s business operations in terms of profitability, market development, the regulatory environment and customer relevance.

There are no major job cuts on the horizon in Germany, despite speculation about an additional reduction by up to 10,000 jobs.

Deutsche Bank’s supervisory board met with the management board last week at Lake Tegernsee in Bavaria to discuss the bank’s reorganization under Mr. Cryan. Sources said that while the new chief has said he wants to step up the bank’s cost-cutting plans, he declined to give a figure for job cuts as part of the bank’s new five-year strategy.

All that is known so far is that the 98,000-strong workforce will decline by 15,000 as a result of the planned spin-off of retail banking unit Postbank.

Bloomberg financial news has reported that another 8,000 jobs could be cut at the Frankfurt-based bank. According to financial sources, however, there are no major job cuts on the horizon in Germany. At last week’s supervisory board meeting, Mr. Cryan merely hinted that the bank would need to renew its IT system and complained about the high number of back-office staff in other countries. That could put many jobs in low-cost countries at risk in the medium term.

Within Germany, the closure of 200 branches is also likely to lead to some job cuts, but one workers’ council noted that many of these employees will be moved to other branches. Reducing employee numbers in Germany will be more difficult.

Some analysts pushed for a tougher, credible restructuring. A 10 percent reduction in the workforce, on top of the 15,000 being cut with Postbank, would be “credible,” said Jon Pearce, an analyst with the Japanese bank Nomura.

Deutsche Bank has been active in Russia for more than 130 years. In addition to investment banking, the bank advises wealthy clients on investment, conducts transactions for companies and finances exports. Last year, Deutsche Bank’s more than 1,200 staff in Russia earned some €77 million, or $87.1 million, a tiny fraction of the group net profit of €1.7 billion.

Investment banking turnover has slumped in Russia since the West imposed sanctions on Russia last year over the Ukraine conflict.

Germany’s largest bank is under suspicion of having helped Russian customers to launder money and shift capital abroad in transactions worth some €6 billion. Regulators in the United States, Britain, Russia and Germany are investigating the case and the bank is checking why the irregularities didn’t show up in internal controls and only came to light in April.

Even the FBI has launched a probe because some bank staff are alleged to have had contacts with the Russian mafia, said financial sources. The bank declined to comment.

The scandal has alarmed Deutsche’s management because it was only uncovered by accident and didn’t stem from the financial crisis, unlike the plethora of other legal disputes the bank is involved in.

Even if the fine that Deutsche Bank is expected to face will be manageable, the management is closely watching the case, sources said.

“Russia has shown us that we need to do a lot more work on the know-your-customer process,” said one insider.

The bank checks every new customer to avoid money laundering, but the scandal had highlighted the need for close scrutiny of clients, and even of other banks Deutsche did business with, said one insider.

While the investigation in Russia goes on, the management board chairman of Deutsche Bank Russia, Jörg Bongartz, has returned to Frankfurt. He hasn’t been tainted by the scandal because his main function was as head of global transaction banking in Russia. Mr. Bongartz is even being promoted and will in future focus on business in central and eastern Europe.

 

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Meanwhile, Deutsche Bank announced Monday that Richard Meddings, the former finance director of Britain’s Standard Chartered bank, would join its supervisory board as chairman of its audit committee.

Mr. Meddings will fill the vacancy left by Mr. Cryan following the latter’s rise to become co-CEO.

Mr. Meddings has more than 30 years’ experience in finance, working at Barclays and Credit Suisse as well as Standard Chartered. He worked with long-time Standard Chartered Chief Executive Peter Sands and his deputy Mike Rees to expand the bank’s operations in Asia, Africa and the Middle East.

When Mr. Sands quit under pressure from investors, insiders saw Mr. Meddings as a suitable successor because he had often proved his worth in tough situations. But then, in 2012, documents of the New York financial regulatory authority suggested that he had launched into a tirade over a U.S. investigation into a suspected breach of sanctions against Iran, saying: “You f—ing Americans. Who are you to tell us, the rest of the world that we’re not going to deal with Iranians?”

Mr. Meddings disputes having said those words. But market observers said his row with the New York regulator contributed to his departure from Standard Chartered in 2014. He has since concentrated on supervisory board posts. Deutsche Bank should keep him busy.

 

Laura De La Motte is an editor at the Handelsblatt finance desk and a specialist banking correspondent. To contact the author: delamotte@handelsblatt.com

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