Deutsche Bank

The Battle for the Future

Straus ande Neske Action Press
Postbank CEO Frank Strauss (r) and Deutsche Bank board director Rainer Neske.
  • Why it matters

    Why it matters

    • Deutsche Bank is at a crossroads and the direction it chooses could well determine whether it returns to profitability in the long term.
    •  
  • Facts

    Facts

    • Deutsche Bank is due to publish its annual results on Thursday. It is likely to report a loss for the fourth quarter.
    • The bank is considering selling off its retail arm Postbank, which it acquired in 2010.
    • Chief executives Jürgen Fitschen and Anshu Jain are under increasing pressure to turn things around.
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    Audio

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The number 24 has a special meaning for Postbank boss Frank Strauss. To this day, the two digits occupy a special place in the office of the board chairman of the storied Bonn-based retail bank, which since 2010 has been a subsidiary of Deutsche Bank.

The number stands for a risky and almost forgotten experiment with which Mr. Strauss had hoped to make his name as a younger banker.

“Deutsche Bank 24“ was launched in 1999. At that time, the Frankfurt-based bank, Germany’s largest, planned to concentrate on its major clients and investment banking operations, while spinning off its traditional, branch-based business based on private deposit accounts and loans to companies.

The objective had been to take “24” public, but just three years later the decision was reversed – clients of the spin-off felt they were being treated like second-class citizens – and the bank reincorporated its branch operations into the main company. Ever since, many bankers consider the failed spin-off idea as symbolic of the bank’s one-time arrogance.

Not Mr. Strauss. For the current Postbank chairman, the concept of a single unit, offering uncomplicated products to clients, using simple procedures, still seems like a good idea – even if perhaps it was a few years ahead of its time.

But now, its time may well have come again. Deutsche Bank, which is due to report full-year results on Thursday, is in the middle of a major rethink of its strategy, forced by an ongoing lack of success and gloomy prospects.

Rainer Neske is isolated. Since taking office Deutsche Bank’s co-chief executive Anshu Jain has filled most key positions with staunch allies.

But now, its time may well have come again. Deutsche Bank, which is due to report full-year results on Thursday, is in the middle of a major strategy rethink, forced by an ongoing lack of success and gloomy prospects.

The bank’s managers point out that nothing has been decided yet, and that all departments are coming under the microscope. But their main focus is clearly the business with private clients. A complete or partial separation of Postbank from the rest of Deutsche Bank’s operations is one option being seriously discussed.

There is much more at stake than the question of where the best business can be done in future. It is about the identity of Deutsche Bank. The tone of the internal discussions has been fierce indeed. The investment bankers, most of them based in London, and the Germany-based client-relationship managers are at loggerheads with each other.

The ruptures reach right to the board room. Rainer Neske, the head of the private clients business, is isolated. Since taking office in 2012, Deutsche Bank’s co-chief executive Anshu Jain has filled most key positions with staunch allies who – like himself – came from the investment banking side of the business.

But all is not lost for Mr. Neske. He has about 40,000 employees in his part of the business – nearly half of those in Postbank – making it the biggest single block in Deutsche Bank’s overall workforce of nearly 100,000. He is seen by the public and politicians alike as the “good” part of the bank, a solid counterbalance to the gambling activities of the investment bankers.

 

paul Achleitner source dpa
Paul Achleitner is regarded as a consensus-builder, but criticized for being a weak strategist. Source: DPA

 

The unsure future is also putting Paul Achleitner, Deutsche Bank’s non-executive supervisory board chairman, under pressure. He was an uncontroversial choice when appointed head of the supervisory board at the beginning of 2012. But many bankers now criticize his indecisiveness.

“He has completely lost control of the boardroom conflict,” said one top banker, who declined to be named. He claimed that, by hesitating, Mr. Achleitner is contributing to an excruciating paralysis spreading throughout the bank. Announcements to the effect that there would be “no taboos” in the restructuring process are of little help.

Insiders assume Mr. Krause is actively making the case to sell Postbank. And he may well have support on the executive board.

This is not the only goal that Deutsche Bank has missed since its merger with Postbank. Because of Deutsche Bank’s own mistakes and unfavorable market developments, the overall private client business is far from its lofty objectives. And there is no improvement in sight, as low interest rates mean income will remain under pressure.

Mr. Jain avoided making any clear pronouncements last week at the World Economic Forum in Davos, Switzerland. “There are enough clients telling me that they need our comprehensive range of services,” he said.  He did not say if this included greeting cards and gift-wrapping paper – a side business for Postbank next to its savings books and popular installment-plan loans.

Mr. Jain and Mr. Fitschen are not expected to be any more precise on Thursday when the bank presents its results for 2014. The usual annual news conference for the event has been cancelled in favor of a telephone conference call; questions about the future will have to wait until May. By then, the concept for the coming years is supposed to have been completed.

This is what Deutsche Bank’s Mr. Achleitner has called for. Amid all the apathy and bewilderment of recent years, he has sometimes appeared to be the only beacon of light. And while the former board member of German insurer Allianz is exceptionally affable and intelligent, he is also a hesitant tactician who prefers to avoid conflict. Decisions, especially of the tough variety, are not his thing.

“Instead of drafting a strategy, the content of which he considers to be correct, he talks of a decision and lets everyone have their say,” said a high-ranking banker who compares the whole process to casting a TV show – all actors get a chance to audition, and whoever gets the most votes, wins.

Up to now, Mr. Achleitner has survived the bank’s decline because he started only after the entire mess had already been created. Apart from a nebulous promise to change the corporate culture, so far he has made little contribution to a better future.

The man entrusted with organizing that better future is Stefan Krause. When Deutsche Bank announced in 2014 that the one-time chief financial officer and management board member would be in charge of developing the new strategy, many thought it was a step down for him. Mr. Krause, who is German but grew up in Colombia, is described by peers as a completely independent spirit. He has made enemies as well as friends in an institution riddled with alliances and intrigues.

Stefan Krause CFO DB source bloomberg
Deutsche Bank’s Stefan Krause has forged strong alliances. Source: Bloomberg

 

In fact, it seems Mr. Krause has lost hardly any influence in his new role. His assignment is also an admission that other board members, who should actually have a hand in the strategic talks, have been overburdened by their core tasks. Many are too involved in dialogues with global bank supervisors and investors, according to sources in top management.

Insiders assume Mr. Krause is actively making the case to sell Postbank. And he may well have support on the executive board. Mr. Jain, who headed Deutsche Bank’s investment banking operations before becoming co-CEO, is said to always have been skeptical about the 2010 acquisition.

A Postbank sale could also fail due to Mr. Achleitner’s desire for harmony. He is always at pains to cultivate alliances that will bolster his position – that includes with Frank Bsirske, who is the workers’ representative on the supervisory board.

But whether Deutsche Bank can bring itself to make such a divestment is doubtful. Postbank has €6 billion in assets on its balance sheet, but no one is likely to pay that much for the bank; there would have to be write-offs. A sale would also mean breaking off the integration process at the halfway stage.

“The Postbank is not in need of any rescue operation; it has potential in the long-term, especially when interest rates turn around,” said one banker, who declined to be named. In his opinion, were Deutsche Bank to leave the field of play now, it would have done a great deal of plowing then neglected to reap the harvest.

A Postbank sale could also fail due to Mr. Achleitner’s desire for harmony. He is always at pains to cultivate alliances that will bolster his position – that includes with Frank Bsirske, who is the workers’ representative on the supervisory board. The boss of Verdi, Germany’s second largest trade union, used his connections to Postbank to join Deutsche Bank’s supervisory board in 2013.

About 60 percent of Postbank’s employees are trade union members. When employees marched on the streets during a strike in 2011, Mr. Bsirske spoke disparagingly of “hardliners on the board who could never have enough.” It is unlikely he or his supporters would willingly relinquish this power base.

For top management too, the discussion is all about power – and about the chance to lobby for the top job. In 2017 the contract of Deutsche Bank’s Mr. Fitschen, who will then be 68, runs out. The race to succeed the increasingly exhausted-looking co-chief executive is already underway.

It’s possible a suitable candidate could inherit more than just Mr. Fitschen’s job. It is by no means certain that Mr. Jain’s time as co-CEO won’t also expire in two years’ time.

It’s not Deutsche Bank’s legal troubles that are the problem for Mr. Jain. It is considered unlikely that he would again stumble over a scandal like the manipulation of the reference interest rate Libor. His strategic errors are considered far more serious.

For example, he is said to have bet far too long on a comeback of bond trading, and he completely misread the market, high-ranking bankers and investors said. They also said the management duo underestimated just how tightly regulators would be putting big banks on a leash. The bank has its work cut out to fulfill all of its regulatory requirements.

Discussions about possible successors are rife within the bank. Marcus Schenck, who in May will become the new chief financial officer, is already considered a candidate. A former member of Goldman Sachs and of utilities firm E.On, Mr. Schenck was pulled into Deutsche Bank by Mr. Achleitner himself.

Insiders also think it’s possible that Mr. Krause could get the top job, if he manages the new strategic overhaul to everybody’s satisfaction. Both Mr. Krause and Mr. Schenck would be capable of doing the job on their own.  After three years, the dual leadership model is no longer seen as an ideal solution. Messrs. Fitschen and Jain clearly get on well, but it is extraordinary how few new initiatives seem to have come from them.

Jain and Fitschen dpa
Co-CEOs Anshu Jain and Jürgen Fitschen get on well, but are they generating enough new ideas? Source: DPA

 

 

A farewell to Postbank, or indeed to the complete retail banking business, would make the leadership transition easier. One reason why the search for Josef Ackermann’s successor in 2011 proved so difficult was that no one candidate could take over responsibility for all the different corporate cultures within Deutsche Bank.

Those on the retail banking side fear having to pay fat cat investment bankers even more bonuses, perhaps even having to pay for them with their own jobs.

Experienced managers see this as a chance for the bank to focus on its roots. “Essentially the Deutsche Bank has always been by the side of big companies and investors internationally,” one manager said. Client-focused investment banking and asset management were always part of this approach – less so the business with savers and home loans.

This has made life difficult in the bank for years. Investment bankers used to make disparaging remarks years ago about how they had put out their “feelers.” The deposits of private customers were a good way of financing their business. Today, deposits are much less important in view of the current liquidity glut.

A planned law requiring banks to separate commercial and investment banking operations would clog up the channels even further. When Deutsche Bank was taking over Postbank, it paid insufficient attention to supervisory authorities.  One of its arguments in favor of the merger was that the financial base of its investment banking operations would be considerably expanded due to the deposits of Postbank’s savers. But the German financial supervisory authority BaFin forbade this all too generous transfer of funds and insisted on a strict separation between the two operations.

This separation is also an everyday reality. More than six years after the takeover, the 15,000 employees of Postbank still remain alien elements in the wider firm.

All attempts at bridging the cultural differences – at least at the management level – have been in vain. And that is despite the bank pulling out all the stops, from joint go-kart sessions to making juggling balls – all the tricks of the team-motivational trade.  Even Mr. Strauss, who learned his trade at Deutsche Bank before moving over to the subsidiary, is said to keep his distance from former colleagues.

And yet, despite the many rumors, the integration project is running ahead full steam for now. The heart of the integration process beats in the third floor of an office building on one of Frankfurt’s main boulevards, the Theodor-Heuss-Allee. Hundreds of specialists from Deutsche Bank and Postbank are working here on “Magellan.” The IT platform is seen as a pioneering project of the German banking world. It will accommodate the data of 30 million clients, and the bank is investing €1 billion.

A source close to the bank denies that the “Magellan” project is behind schedule and that cost-savings objectives have hardly been achieved. There were reportedly only small delays and the project is only a little more expensive than planned. Managers in Frankfurt still blame Mr. Jain for things not working out even better.

“We should be forging ahead with digitalization, but there is hardly any money there for it,” one manager said. Instead of investing in the expansion of its stable retail business, the bank has been trying to improve its investment banking performance in the Unites States – with only modest success, he said. One insider asked defiantly why management isn’t considering spinning off the trading business, instead of its retail banking arm.

Those on the retail banking side fear having to pay fat cat investment bankers even more bonuses, perhaps even having to pay for them with their own jobs.

There are major worries at Postbank. As the products they sell are mostly straightforward, low interest rates are a greater burden for them than they are to the branches of the Deutsche Bank. A clause in employee contracts that protected them from dismissal for operational reasons came to an end in 2014. New negotiations are scheduled for mid-February. The workers’ councils claim they are ready for the fray, but their position is not made any easier by the bank’s murky future.

Deutsche Bank Missed Targets-01 correct

One horror scenario for the employees of Postbank would be a sale to the Spanish bank Santander, Europe’s largest bank by market value. Santander already showed interest back in 2008, eventually losing out to Deutsche Bank. The Spanish giant implemented a capital increase of about €7.5 billion ($8.5 billion) at the beginning of this year, giving it enough cash to finance possible acquisitions.

Santander is highly efficient. The bank is like a factory; the relationship of costs to returns is as low as 50 percent. If Postbank were to work just as efficiently, that would be possible only with a radical loss of jobs. At the same time, sales would have to increase to reach that objective.

A look at Postbank’s home savings products shows just how much room there is for efficiency gains. The many employees selling home savings contributed €1.2 billion in new business last year. Postbank’s much smaller mobile sales groups brought in twice as much.

Since the financial crisis, the results of Postbank have continually improved – at first sight anyway. It earned €431 million by the end of September 2014. But the figures are misleading.  In April the bank moved some service companies into a holding of Deutsche Bank, a move that amounted to one-time profits of  €349 million.  The similarly good results of the previous year were also provided by a one-off transaction: The sale of a U.S. subsidiary brought in €262 million.

In its core business however, returns are in decline. It is true that the institution has built up a strong position in installment loans. However, results for its private client business in the first half of the year were down by about 7 percent compared with the previous year.

Moreover, the bank has a millstone around its neck with BHW Bausparkasse, a building society. The subsidiary is suffering badly due to low interest rates. Net earnings fell in 2013 to €11 million from €44.5 million. The situation will hardly have improved last year. And yet Postbank’s boss, Mr. Strauss, could hardly be called frugal. Under his management, expenditure on external consultants increased by almost half to €112 million in 2013.

Prospects for retail branches run under the Deutsche Bank brand are somewhat better. Its clients are wealthier and falling interest-rate returns can more easily be compensated by selling more securities.  But business is still weak. Pre-tax profits at its retail arm were just €40 million in the third quarter of 2014.

The mood here isn’t much better than at Postbank.

 

 

This article first appeared in Wirtschaftswoche. Cornelius Welp covers the banking industry in Frankfurt. To contact the author: Cornelius.welp@wiwo.de

 

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