Deutsche Bank

Running Out of Patience

Achleitner finger mouth dpa
A busy day ahead for Paul Achleitner.
  • Why it matters

    Why it matters

    Deutsche Bank needs to deliver on its promises to cut costs and increase returns or it may face a shareholder revolt.

  • Facts


    • Deutsche Bank’s shares lost 24 percent of their value in 2014.
    • As part of the new strategy unveiled in April, co-CEOs Mr. Jain and Mr. Fitschen decided to preserve Deutsche Bank as a global universal bank.
    • The bank’s leverage ratio is relatively low, at 3.5 percent in 2014, but management aims to increase it to at least 5 percent by 2020.
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Paul Achleitner is calm, softly-spoken and diplomatic.

That helps him as chairman of Deutsche Bank’s supervisory board, the non-executive committee that hires and fires chief executives and confirms management decisions.

Mr. Achleitner also sets great store by being prepared for the meetings he chairs. He tries to resolve disputes in advance, if he sees trouble ahead with major investors.

This year, that strategy didn’t get him very far.

Thursday’s annual meeting of shareholders is more likely to be chaotic, full of angry shareholders criticizing the bank’s co-chief executives, Anshu Jain and Jürgen Fitschen.

Many influential major investors intend to withdraw their support for the co-CEOs and issue a formal disapproval of the actions of the management board.

Two problems, closely linked, have plagued the bank for years: The chronically low returns and notoriously scarce capital.

The annual meeting could have been a lot easier.

For months, investors had been hopeful as executives of Germany’s largest bank huddled behind closed doors to hammer out a new strategy for the future. When Mr. Jain and Mr. Fitschen presented the results on April 27, many investors were disappointed.

The bank’s share price reflects these early hopes – and the ensuing disappointment.

The Deutsche Bank share lost 24 percent of its value in 2014, the largest decline in the share price of any major bank in that year. But then, from the beginning of the strategy discussion last December until the announcement in April, the share price increased by up to 30 percent – only to lose 6 percent of its value again after the announcement in April.

These numbers show that the bank is still finding itself – even though it has been three years since the resignation of the previous chief executive, Josef Ackermann, and the start of the Jain-Fitschen era.


Overhauling Deutsche Bank-01_redo


After lengthy discussions of strategy, the management board decided to stick with the model of a global universal bank, a model that many of its peers have discarded.

“It isn’t because we can’t think of anything better, but because we are convinced that this is the right approach, and because both customers and lawmakers support us in this decision,” Mr. Fitschen said at a press conference.

The board had decided against splitting Deutsche into two parts, a retail bank and a commercial bank, which would have focused on investment banking and asset management.

Instead, the co-CEOs plan to sell off Postbank, a retail subsidiary, just seven years after buying the German institution. They will also close up to a third of the remaining Deutsche Bank retail branches and reduce the balance sheet of its investment banking division by €130-150 billion, or $144-167 billion.

So why all the soul-searching about strategy? Two problems, closely linked, have plagued the bank for years. The chronically low returns and notoriously scarce capital needed to be addressed.

When Mr. Jain and Mr. Fitschen came into office in June 2012, they promised the shareholders a 12-percent return on equity (ROE).

In 2014, this key performance indicator only reached 2.7 percent, and despite a robust first quarter of this year, the bank only managed to achieve an ROE of 3.1 percent.

In the new 2020 strategy presented in April, the co-CEOs have scaled down their expectations. They now aim to achieve a double-digit return on so-called “tangible equity.” The distinction is important, because tangible equity does not include intangible assets and goodwill.


Phew. Source: DPA


In other words, Deutsche Bank has essentially scaled back its expectations twice, once with its departure from the 12-percent target ROE and then by reducing the denominator in the yield equation.

One key reason for the bank’s disappointing profitability is the long list of scandals and associated legal costs.

Deutsche Bank paid €1.6 billion ($1.78 billion) in fines in 2014, plus another €2.3 billion in the first quarter of this year to settle the Libor scandal that engulfed a number of global banks. The legal problems are likely to plague the bank for some time to come and continue to adversely affect performance.

The legal expenses have eaten up most of the fresh cash that Deutsche Bank raised during two capital increases in the era of Mr. Jain and Mr. Fitschen. This is one reason the bank’s equity base is modest compared to the competition.

Mr. Jain and Mr. Fitschen are especially concerned about the leverage ratio, which compares equity to total assets and was 3.5 percent at the end of 2014. Experts assume that banking industry regulators – who have come to favor the leverage ratio as a measure of health since the 2008 financial crisis – will require major banks to achieve a ratio of at least 4 percent in the future.

The two co-CEOs are now trying to turn the bank’s weakness into a strength and want to achieve a ratio of at least 5 percent by 2020. That would place Deutsche Bank at the forefront of the industry and not at its tail end.

Instead of going down, the ratio of adjusted costs to revenues increased from 80 percent at the beginning of the cost-cutting program to 87 percent in late 2014.

This ambitious project can only succeed if the bank implements its strategy without compromise. But that is precisely what many investors doubt, which is why they were so irritated when the bank postponed providing the full details of its strategy until the end of July.

Major investors are especially suspicious when it comes to the cost-cutting goals. Deutsche Bank plans to reduce the ratio of costs to revenues to 65 percent by 2020. But this is actually what the two co-CEOs had already promised to do by the end of 2015.

Instead of going down, the ratio of adjusted costs to revenues increased from 80 percent at the beginning of the CEO’s last cost-cutting program to 87 percent in late 2014. In other words, Deutsche Bank pays 87 cents in costs for each euro it earns.

Because frustrated investors are no longer willing to buy even more Deutsche Bank shares, the Postbank spin-off is expected to help fill the capital buffer. Mr. Jain and Mr. Fitschen hope that the reorganization of the entire retail banking business will reduce debt by €140 billion.

But the bank isn’t just cutting costs in its retail banking business. Owing to the strict requirements of regulators, it is becoming more and more difficult for Deutsche Bank to make money in its traditional specialty, investment banking and, specifically, commercial transactions. Income and profits stagnated in the Corporate Banking & Securities division in 2014.

In the largest segment of the business, bond trading, Deutsche Bank achieved an after-tax return on equity of about 11 percent, equal to that of investment bank Goldman Sachs.

Climbing wall fitschen HB
A tough climb. Mr. Fitschen spoke at a recent Handelsblatt event about the importance of trust. Source: Handelsblatt


Still, there is an important difference between the two financial institutions: Deutsche Bank needs twice as many total assets to achieve the same result. In other words, the Frankfurt bank’s business is far more capital-intensive. That’s now expected to change with the restructuring plan.

But costs are not being cut everywhere. Deutsche Bank wants to continue expanding its asset management division, as well to invest more in payment transactions. These two areas are also the ones providing positive news at the moment.

In 2014, the Asset & Wealth Management division brought in €40 billion in new money. It added another €17 billion in the first quarter of 2015, bringing the bank’s assets under management to €1.2 trillion. This growth is also reflected in profits. From 2012 to 2014, earnings before taxes increased by €200 million to more than €1 billion.

The Global Transaction Banking (GTB) division has done even better, with an impressive 14 percent return on equity in 2014. Its expansion will be led by Stefan Krause, the bank’s current chief financial officer, it was announced Wednesday night.

But Mr. Jain and Mr. Fitschen know all too well that these small glimmers of good news are still overshadowed by the long list of problems at Deutsche.

Shareholders, whose patience has been tested too long, and are all too aware of these problems, are unlikely to be appeased easily either.


Michael Maisch is the deputy chief of Handelsblatt’s finance desk in Frankfurt. Laura de la Motte is a specialist banking correspondent. To contact the authors:,

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