When John Cryan started his new job at Deutsche Bank in early July, he offered employees a tough reality check. In a letter to staff, the new chief executive of Germany’s largest financial institution said the bank was inefficient and its business model too complex.
His prescription: A tough austerity program over the next five years.
Solid restructuring is part of Mr. Cryan’s managerial DNA, which he honed as finance chief at Swiss bank UBS before moving to Frankfurt.
The good news is that, even as Deutsche Bank reduces its presence in investment banking and closes some retail branches, it will invest in other growing areas as part of a “Strategy 2020.” Two areas deemed promising are its global transactions and asset management businesses.
The two business fields will probably help Mr. Cryan present upbeat figures next week when he unveils the bank’s second-quarter financial results on July 30.
A planned conference call with investors to present the results will mark a debutant ball debut of sorts for the British banker, who is co-chief executive with Jürgen Fitschen until Mr. Fitschen steps down in May next year.
The event next Thursday will be the first time investors hear publicly from the man who replaced the former co-chief executive, Anshu Jain, and to ask direct questions of Mr. Cryan about the bank’s strategy going forward. The press will have to wait for their own chance, as no press conference is planned.
“Although Deutsche Bank reported a very strong first quarter, it would be a positive surprise if it achieved the same thing in the second quarter.”
Deutsche Bank is expected to report a 10-percent increase in total revenue from the same quarter last year, to €8.7 billion ($9.53 billion), according to the consensus forecast of 15 bank analysts that have already released estimates.
That would still be a smaller increase than in the first quarter of this year, when the bank reported a 24-percent year-over-year increase in revenue.
“Although Deutsche Bank reported a very strong first quarter, it would be a positive surprise if it achieved the same thing in the second quarter,” said Michael Seufert, an analyst with state-owned NordLB bank.
Mr. Cryan has so far kept a low profile, avoiding public appearances since being named at the start of June to replace Mr. Jain.
That meshes with his reputation as a manager who works behind the scenes. Mr. Cryan has already held a series of meetings with regulators and government officials in Berlin. The low-key approach is in contrast to the more flamboyant Mr. Jain.
The coming 12 months will be key for the bank’s transformation from a inconsistently profitable financial behemoth with a stack of legal problems.
From May of next year, after Mr. Fitschen steps down, Mr. Cryan will be on his own.
The next year isn’t likely to be easy.
The bank’s legal expenses will continue to pressure its bottom line, even after major cases, such as the Libor rate-rigging case, which ended in a record $2.5 billion fine, were resolved.
The bank still faces legal cases from dealings by its traders and managers in the runup to the 2008 financial crisis. German regulators issued a scathing report attacking the bank’s culture earlier this month – a tough welcome for Mr. Cryan.
According to the consensus estimate, Deutsche Bank will likely increase its reserves for legal costs by another €670 million in the second quarter, leaving earnings before taxes after general expenses of €1.25 billion. That would be a year-over-year increase of 36 percent.
Mr. Cryan is expected to raise the bank’s legal provisions to get out in front of the problem — declaring pending losses now rather than later to better manage market expectations.
But that could be a risk in itself. While Mr. Cryan wants to quickly resolve the issue of legal disputes, a substantial increase in the reserves for legal risks “could encourage judges and regulatory agencies to demand even higher penalties,” said Mr. Seufert.
The transaction banking division, which includes cash management, trade financing and payment transactions for companies, along with asset management, are expected to be the prime drivers of earnings.
In both areas, analysts anticipate a pretax profit 50 percent higher than in the previous year.
Those expectations have been fueled by Joachim Häger, the head of German asset-management operations, who has said he continues to support an annual profit target of €1.7 billion for the division despite a comparably weak first quarter.
“We expect to see significant growth here in the second quarter,” said Dirk Becker, a banking analyst with Kepler Cheuvreux in Frankfurt.
By contrast, the trade in bonds and foreign currencies that is so important to Deutsche Bank probably came under pressure over the last three months. That trend was revealed by U.S. banks like JP Morgan and Goldman Sachs, which have already released their second-quarter results.
Mr. Cryan’s challenge in the investment-banking sector is that it requires a lot of capital to earn profits – a difficult thing to come by in an age where regulators are raising capital requirements in a bid to make banks less risky. It’s a problem facing many European banks, which typically have lower capital reserves than their U.S. counterparts that were forced to raise their reserves more quickly after the 2008 financial crisis.
Mr. Cryan is hoping take action to reduce the bank’s dependency on high amounts of capital. Even before he was made Deutsche Bank’s CEO, the bank set out a goal of achieving a leverage ratio – a measure of a bank’s equity compared to its loans – to 5 percent.
Reducing the dependency on capital is something Mr. Cryan does not see as a competitive disadvantage.
Analysts at U.S. bank Morgan Stanley disagree – and not just for Deutsche Bank. The team headed by Huw van Steenis estimates that ongoing restructuring programs could cause Europe’s major banks to lose 4 percent of their market share in investment banking to the U.S. competition.
Laura De La Motte is an editor at the Handelsblatt finance desk and a specialist banking correspondent. Christopher Cermak of the Handelsblatt Global Edition contributed to this story. To contact the author: firstname.lastname@example.org