Bank Overhaul

Rude Awakening for New Deutsche Duo

Paul Achleitner, Aufsichtsratschef, Deutsche Bank,  [hier: Deutsche Bank Zentrale], Frankfurt a.M., 01.04.14
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  • Why it matters

    Why it matters

    Investors and analysts will demand swift results from new CEO John Cryan. He will need to perform, or his mentor’s standing, already shaken by months of management turmoil, will suffer irreparably.

  • Facts

    Facts

    • Some shareholders have criticized Supervisory Board Chairman Paul Achleitner, saying he should have acted sooner to stop the management turmoil at Deutsche Bank.
    • Banking sources say Mr. Cryan won’t change the bank’s recently announced strategic overhaul, which has been approved by Mr. Achleitner.
    • There is concern that several senior executives closely associated with outgoing co-chief Anshu Jain will follow him out of the bank.
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Deutsche Bank’s chairman, Paul Achleitner, had about 24 hours to enjoy the wave of positive investor reaction to his surprise announcement of a CEO replacement, before Germany’s largest bank became engulfed in yet another possible legal scandal.

On Tuesday morning, armed police raided the bank’s iconic twin-tower headquarters in Frankfurt. According to Handelsblatt sources, they were looking for information related to possible tax fraud by the bank’s customers – not its employees.

That would mark a change from many of the other legal troubles that have engulfed the bank. But the latest raid still highlighted the massive challenges facing the bank’s new chief executive, John Cryan, who will be tasked with turning around the bank’s fortunes, as well as Paul Achleitner, who is desperately hoping for a fresh start.

The chairman of Deutsche Bank’s supervisory board, which has the power to hire and fire its managers, used that very power in spectacular fashion on Sunday afternoon. Mr. Achleitner charged Mr. Cryan, a mild-mannered Brit, with steering Germany’s largest bank out of troubled waters.

The share price jumped as much as 8 percent on Monday as investors breathed relief at the resignation of co-chiefs Anshu Jain and Jürgen Fitschen, who have been running the bank since 2012. Mr. Jain will leave at the end of the month, while Mr. Fitschen will remain in a transitional phase as co-CEO with Mr. Cryan until next year.

Paul Achleitner has showered his new chief executive with praise, saying in a letter to the bank’s 100,000 employees that he stood “for the personal and professional values needed to move Deutsche Bank forward and successfully implement the 2020 strategy,” referring to the massive five-year restructuring that was announced under the previous management in April.

Mr. Cryan’s name wasn’t connected with past problems at Deutsche Bank, Mr. Achleitner wrote. And in a swipe at Indian-born Anshu Jain, who is also a British citizen, Mr. Achleitner noted that Mr. Cryan even speaks German.

This eulogy, combined with thinly-veiled criticism of the departing management, is out of keeping with the usual bland statements that accompany management changeovers.

Mr. Achleitner has tied his fate to that of Mr. Cryan. A new duo is running Deutsche Bank: Mr. Cryan, the introverted details man, and Mr. Achleitner, the well-connected Austrian controller.

“Cryan must now show that he can achieve all the goals that Jain missed. Otherwise, not just the management but the supervisory board as well risks being taught a lesson.”

Deutsche Bank Investor

Indeed, it seems that the switch, while a surprise for the markets, may have long been in the back of the mind of Mr. Achleitner, who ran the German operations of Goldman Sachs and is a former board member at Allianz.

It was Mr. Achleitner who brought Mr. Cryan, a former chief financial officer of UBS, into Deutsche Bank’s non-executive supervisory board in 2013 as a possible replacement for Mr. Jain, should one be needed.

“Achleitner acted with foresight,” said Helmut Hipper, a fund manager at Union Investment in Frankfurt.

But not everyone is quite as forgiving. Some shareholders feel he reacted too late to mounting investor criticism of Anshu Jain and Jürgen Fitschen in recent weeks, culminating in a revolt at the annual shareholder meeting on May 21 at which only 61 percent voted to exonerate the management.

The embarrassing outcome – managers in Germany typically get a 95-percent approval ratings from shareholders – could have been avoided. Mr. Achleitner had called a supervisory board meeting the day before – and backed his embattled CEOs rather than replacing them.

“Evidently, the mood among investors was completely misjudged; otherwise, the change in management would have been announced before the meeting,” said one major investor in Deutsche Bank, who, like others interviewed for this article, asked to remain anonymous.

“We made it clear to Achleitner that the supervisory board must act if it wants to preserve its credibility,”  another said.

DBHeadquarters-Bloomberg
A morning raid on Deutsche Bank’s headquarters put the bank’s legal troubles back in focus. Source: Bloomberg

 

Even after the revolt, Mr. Achleitner waited nearly three weeks to act. Shareholders said the board should have acted more decisively and sooner after the tumultuous shareholder meeting revealed the degree of discontent with the management over weak earnings, scandals and lawsuits that were producing mega-fines that devoured profits.

It seems clear that while Mr. Cryan may be the new man in charge of day-to-day management, it is Mr. Achleitner and the policy-setting supervisory board that will be left holding the bag if he fails to turn things around.

“Cryan must now show that he can achieve all the goals that Jain missed; otherwise, not just the management but also the supervisory board risks being taught a lesson,” said another big investor in Deutsche Bank.

For now, Mr. Achleitner can draw some comfort from the positive reception Mr. Cryan received on Monday.

“Cryan is known for exceeding targets,” said one investor. “By contrast, the previous management made many promises but kept few of them.”

While Mr. Cryan may be charged with meeting these promises, he has arrived too late to dictate the grand strategy itself. Just in April, Deutsche Bank announced a massive overhaul that involves deep cuts to retail banking – including the sale of retail arm Postbank – and some lesser cuts to investment banking.

Banking sources said Mr. Cryan will likely stick to the restructuring plans, which were given the blessing of Mr. Achleitner’s supervisory board. But he may be wise to make some adjustments to the overhaul, which is aimed at saving €3.5 billion, or $3.9 billion, in costs by 2020.

 

Deutsche Banks New Goals-01

 

In many ways, Mr. Achleitner has taken a 180-degree turn with his new choice. Mr. Cryan spent much of his career as a traditional banker – a consultant rather than trader. That position has left him less tarnished by the excesses and hubris the characterized Wall Street ahead of the 2008 crisis.

“The change in culture is sure to be easier to implement now than with Jain, who ran investment banking for a long time,” said Philipp Hässler, an analyst at Equinet.

Within hours of Mr. Cryan’s appointment, shareholders lined up with demands and advice for the new man in charge. Some called for Deutsche Bank to go back to its roots as a traditional commercial bank and ease back on the expansion throttle that took it deep into investment banking in Wall Street over the last decade under Mr. Jain and his predecessor, Josef Ackermann.

Blackrock, the world’s biggest asset manager, called for a more determined withdrawal from investment banking. Many other banks had already taken that step, Blackrock Vice Chairman Philipp Hildebrand said in Vienna.

“That’s a positive development in my view. I would very much welcome it if we were to see more of this from Deutsche Bank in future,” he said.

That stance was echoed by Carsten Schneider, finance policy expert for the center-left Social Democrats, junior coalition partners to Chancellor Angela Merkel’s conservatives. “The chance for a fresh start should be used to focus on a conservative, long-term business model,” he said.

Mr. Hässler of Equinet said Mr. Cryan should announce a range of interim goals for 2018, as the current planning until 2020 was too long.

Hans-Christoph Hirt of Hermes EOS, a shareholder consultancy that led the revolt against the bank in May, called for a detailed roadmap for the 2020 strategy with clear short-term, medium and long-term goals.

Several big investors also called for the sale of China’s Huaxia-Bank. Kian Abouhossein, an analyst at JP Morgan, said that in addition to its planned sale of retail bank Postbank, Deutsche Bank should jettison its retail operations in Spain, Italy, Belgium and Poland, which were earning poor returns.

The high legal risks remain a source of concern – Deutsche Bank is involved in about 7,000 lawsuits and regulatory investigations stemming mostly from wrongdoing in the run-up to the 2008 crisis.

Another embarrassing moment was already awaiting Mr. Cryan on Tuesday. About 30 officials and 10 police cars showed up at the bank’s headquarters in Frankfurt in the morning. In this case, according to sources, police were apparently looking for evidence against customers that may have engaged dividend stripping – a complicated form of tax fraud that has also struck Germany’s third-largest bank, HypoVereinsbank.

Policymakers in Berlin have long been worried about the damage to Deutsche Bank’s reputation over the last few years and will be keeping a close eye on the transition at the bank, which holds a special role as a guardian of Germany’s vaunted place in the financial world.

Chancellor Angela Merkel, however, was characteristically sanguine in her reaction to the CEO replacement. The management change had “no surprise effect” for her, Ms. Merkel said on the sidelines of the Group of Seven summit in Bavaria. That couldn’t be said of the overwhelming majority of Deutsche Bank’s 100,000 employees.

 

118 Deutsche Bank-01 (2)

 

One of the tasks facing Mr. Cryan is to hold on to at least some of “Anshu’s Army,” as the lieutenants the outgoing CEO lifted into key positions are described. Many of them anchor the investment banking operations which, while the target of the bulk of the bank’s damaging lawsuits in the past years, are also the divisions that bring in the biggest profits.

Two of them, chief executive for the United Kingdom Colin Grassie and Alan Cloete, in charge of the Asia-Pacific business, announced their departure last month. Mr. Cloete oversaw traders alleged to have sought to rig benchmark rates, for which Deutsche Bank had to pay a record €2.5 billion fine in April.

A whole array of bankers with close ties to Mr. Jain still have key posts at the bank, and Mr. Cryan will need to keep them in order to succeed as CEO. They include Chief Operating Officer Henry Ritchotte, in charge of day-to-day operations and Colin Fan, co-chief of the investment banking division, as well as Michele Faissola, in charge of asset and wealth management.

Mr. Faissola came to Deutsche Bank in 1995, the same year Mr. Jain joined. He was put in charge of the troubled asset management division in 2012 and has managed to increase funds under management as well as cutting costs.

Mr. Fan has been put in charge of managing structural change in the all-important trading department within the investment banking division. And Mr. Ritchotte, who became Chief Operating Officer in mid-2012, recently got an additional important responsibility: steering the bank’s digital transformation.

Some recruitment consultants are already speculating that these managers may soon leave the bank because of their close association with Mr. Jain. Sources close to the bank, however, say there’s absolutely no sign that they plan to leave.

As for Mr. Jain, his phone has already started ringing but the 52-year-old can also imagine a future outside the financial sector. He has strong views, for example, on the United Kingdom’s planned referendum on continued membership of the European Union, and has strongly lobbied for the country to stay in.

 

Laura de la Motte covers Deutsche Bank and other financial institutions for Handelsblatt in Frankfurt. Peter Köhler is Handelsblatt’s former lead correspondent on Deutsche Bank and now spearheads coverage of private equity and other financial sectors. Michael Maisch is Handelsblatt’s deputy finance chief. Christopher Cermak, Yasmin Osman, Katharina Slodczyk and Donata Riedel also contributed to this story. To contact the authors: delamotte@handelsblatt.com, Koehler@handelsblatt.com and Maisch@handelsblatt.com

This story was updated at 16:30 Central European Time with additional details of the raid on Deutsche Bank’s headquarters.

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