Deutsche Bank

Shareholder Revolution, Interrupted

deutsche bank hauptversammlung 19 may 2016 dpa frank rumpenhorst festhalle frankfurt
Some shareholders were critical of Deutsche Bank's top managers and supervisors, but at the annual meeting taking place today in Frankfurt, there appeared to be no critical mass to force further personnel changes at Germany's largest bank.
  • Why it matters

    Why it matters

    Deutsche Bank, Germany’s largest commercial bank, is undergoing massive restructuring to restore its earnings, strengthen its capital base and get to grips with costly litigation from past wrongdoing.

  • Facts


    • Deutsche Bank is holding its annual general meeting in Frankfurt on Thursday and the management faced anxious questions from shareholders about its outlook.
    • CEO John Cryan has warned investors to expect a slight loss for 2016 even though the bank reported a surprise profit for the first quarter.
    • Deutsche Bank made a record loss of €6.8 billion in 2015 and its share price has yet to recover from a slump at the start of 2016.
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When the long-suffering shareholders of Germany’s largest bank filed into the cavernous Festhalle in Frankfurt Thursday for Deutsche Bank’s annual meeting, few had reason to be happy. Shares in the bank, once a symbol of German financial acumen and its global aspirations, have fallen by more than half over the last year.

The dividend had been eliminated for a second year in a row as the Frankfurt-based institution enters a long, painful process to restore one of Germany’s largest private-sector employers to sustainable profit — a recovery that is by no means guaranteed.

So what was most striking as the day-long meeting began was the relatively muted level of outrage that permeated the opening comments of shareholders and their representatives. Should that refrain assert itself, which appeared to be the case, the bank’s owners will likely give a clean bill of health later Thursday to the work of the top management board and policy setting supervisory panel, as well as its embattled chairman, Paul Achleitner.

More than a sense of gratitude, one observer said disappointed shareholders were fearful of further rocking the boat at one of Germany’s biggest listed companies, as it struggles to find a way out of its financial mess.

“There is a sense that the bank is in such a fragile state, that the last thing it needs right now is more turmoil, especially more personnel change at the top,” said one longtime observer of the bank, who declined to be named. “I think you will see a lot of vocal concern, but no real change in the direction of the institution.”

That kind of breathing room could give the bank’s sole chief executive, John Cryan, more time to put into place a halting restructuring at Deutsche Bank. Mr. Cryan, a taciturn British banker who is credited with helping revive Swiss bank UBS, is by now well known in German banking circles for his sober mien, and his willingness to openly lambast the bank for its past transgressions.

The new chief executive of Deutsche Bank — who officially took sole control Thursday with the retirement of his co-CEO, Jürgen Fitschen — left no doubt that 2016 will be another lost year for shareholders.

After surprising investors with a profit in the first quarter, following a record €6.8-billion loss in 2015, Mr. Cryan has warned investors to brace for another slight loss for the full year.

Deutsche Bank’s big clean-up will continue in 2016, Mr. Cryan promised to the gathered 10,000 shareholders, before its fortunes start to improve.

“We need a Deutsche Bank that once again finds its place in the middle of the community,” Mr. Cryan told shareholders, acknowledging the line should be “self-evident” but was actually something Germany’s largest bank had to earn after years of an eroded public reputation. “We want to be able to look forward again,” he added.

“I am aware that your patience has been severely tested over the past few years...Deutsche Bank must finally start finishing things that were started, and not just constantly start over.”

Paul Achleitner, Deutsche Bank Chairman

As he sees it, the less profit Deutsche Bank makes this year, the greater the progress it will make in settling thousands of outstanding legal disputes and with an ambitious restructuring, which includes closing hundreds of branches and leaving loss-making operations around the world. That’s because saving money is an expensive business, at least initially.

Mr. Cryan estimates that the revamp will cost up to €3.5 billion, or $3.9 billion, two thirds of which will be booked in 2016, and should save about the same amount in annual costs by the end of 2018.

The upfront restructuring costs, together with more than €5 billion in legal costs expected this year, are why the bank plans to omit a dividend for 2016, as it did last year for the first time in more than four decades. Shareholders still got €0.75 per share for 2014 even though the payout cost the bank two thirds of its net profit.

The dim outlook has prevented the share price from recovering from its slump at the start of the year. On February 9, the stock fell to a record loss of €13.03, reflecting a wave of mistrust greater even than during the financial crisis. It’s now trading at around €14.30, just 33 percent of its book value.

“For shareholders of the bank, the past few years have been a singular torture that has more than clearly been reflected in the collapse of the share price,” Klaus Nieding, a lawyer and vice president of DSW, a group that represents the interests of smaller German shareholders, said in the run-up to Thursday’s meeting.

And so there was plenty to talk about at Deutsche Bank’s annual general meeting Thursday in Frankfurt, which was set to continue well into the evening. It had been expected to be another turbulent one, with many shareholders likely to refuse to issue a vote of confidence in the bank’s board at the end of the day.

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Most of the shareholder anger was directed not at Mr. Cryan, who only joined the bank in July and drew mostly warm applause. Instead it was directed at the executives and supervisors who have been with the bank since 2012 or earlier.

“Mr. Cryan, you are the right man at the right time and now have to clean up the broken glass that was left by your predecessors,” Ingo Speich, a fund manager with Frankfurt-based Union Investment, a shareholder.

Deutsche Bank’s non-executive chairman, Mr. Achleitner, a former Goldman Sachs banker who has headed the Deutsche’s supervisory board since 2012, drew sarcastic applause when he acknowledged that some have called for him to resign from the chairmanship. Both he and Mr. Fitschen, who on Thursday gave up his post as co-CEO of the bank, suffered occasional angry shouts from the audience during their speeches.

Hans-Martin Buhlman, who represented private institutional investors, slammed the supervisory board for a lack of focus. He complained that there could be no true vote of confidence in the board because there was no real progress that could be approved of. “Where are the results?” he asked.

Many of the bank’s larger shareholders however warned against forcing Mr. Achleitner’s resignation and urged the bank instead to look towards the future. The chairman himself stressed that the right management and strategy was now in place to engineer a turnaround.

“I am aware that your patience has been severely tested over the past few years,” Mr. Achleitner told a packed hall in Frankfurt’s main convention building. “Our public image still has to improve greatly.”

“Deutsche Bank must finally start finishing things that were started, and not just constantly start over,” he said, borrowing a past line from his new chief executive, Mr. Cryan.

Shareholders would likely be able to live with a small year-end loss if Mr. Cryan were able to show that his restructuring was bearing fruit after the record loss of €6.8 billion posted for 2015.

Major milestones would be the resolution of big legal disputes such as the money-laundering scandal in Russia or a dissolution of its non-core operations unit containing risk-weighted assets.

Legal cases and regulatory investigations have cost more than €12 billion since 2012 and the bank has set aside another €5.4 billion in provisions for this year. Mr. Cryan drew perhaps the biggest applause line of his speech to shareholders when he said: “Legal costs of such dimensions are completely unacceptable,” and promised that the bank was nearing the finish line in settling its major cases.

But it must not cost too much. The record loss for 2015 has eaten into the bank’s capital base. At the end of March, the core capital ratio stood at just 10.7 percent. That may sound solid, but the European Central Bank wants Deutsche Bank to increase the ratio to 12.25 percent by the start of 2019.

Mr. Cryan wants the bank to achieve that goal under its own steam, without asking shareholders for more capital. The bank has already sought capital increases totaling more than €20 billion since the financial crisis – more than the bank is currently worth in market value.

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But rebuilding the bank without another capital increase will only succeed if the bank earns enough money.

To be sure, Deutsche Bank doesn’t lack earnings power. Even in 2015, its gross earnings at €33.5 billion were even higher than the year before. But the huge increase in non-interest costs by 40 percent to €38.7 billion pushed the net result deep into the red. This was largely due to litigation costs which climbed to €5.2 billion. But writedowns of €5.8 billion on its investment bank and retail and private banking operations also took their toll.

Even excluding these special charges, the bank still has a cost problem. It has to spend 80 cents to earn €1. That so-called cost income ratio is well above the 70 percent average of German banks.

The key question is whether Mr. Cryan can successfully shrink the bank back to health without depriving it of a functioning business model. And here, even Mr. Cryan came in for some criticism from shareholders during Thurday’s meeting.

“Mr. Cryan, we accept that you are a restructurer, but what is your vision?” asked Mr. Nieding of the DSW. “This you haven’t offered us yet.”

“For shareholders of the bank, the past few years have been a singular torture that has more than clearly been reflected in the collapse of the share price.”

Klaus Nieding, Shareholder representative

For the moment, Deutsche Bank remains caught in the middle. Securities trading remains its biggest source of income. A look at the newly structured business segments shows how important it is: Global Markets, which contains Deutsche’s trading operations, last year generated a third of the bank’s gross income.

Trading income plunged 23 percent in the first quarter even though that period is usually the most successful in the banking calendar. It’s a problem that’s affected the entire banking sector. Dealing in interest-bearing securities, raw materials and currencies has stopped generating the earnings it used to, which has called the entire business model into question.

There are fears that the revamp will throw Deutsche Bank back behind its rivals. Mr. Cryan has said such fears are unwarranted. He’s admitted that the bank is losing market share, but only because it’s concentrating on profitable businesses, even if that means total revenues will shrink.

The bank’s income from asset management and Global Transaction Banking, which includes services like payments and trade financing, is significantly more reliable and stable than its volatile markets business. Mr. Cryan wants to expand both those segments. They generated less income in the first quarter, but the decline was relatively modest and the returns are likely to have remained in double-digit territory.

Deutsche Bank has earned more than €1 billion from Global Transaction Banking in each of the last three years, amounting to a return on equity of around 20 percent. The segment has since been merged with the Corporate Finance division into Corporate & Investment Banking.

Despite solid earnings, both divisions — asset management and Corporate and Investment Banking — only account for 30 percent of total income and can’t offset big setbacks from the bank’s trading operations.

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That’s why Deutsche Bank is so keen to expand its corporate clients business and to restructure private banking.

It isn’t earning very much from private clients, but the sector’s losses in 2015 belie its earnings potential. Excluding writedowns and provisions for job cuts and the closure and modernization of branches, Deutsche Bank’s private clients division earned a three-digit million sum in 2015, even excluding its retail banking unit Postbank. That’s not impressive, but it’s stable ast least.

Mr. Cryan has his work cut out. He’s got the toughest job in European banking. Will he succeed? Analysts are divided. Berenberg Bank has just published a research note on Deutsche Bank headlined “unsurmountable headwind” — with a price target of €9. But Kian Abouhossein, an analyst at JP Morgan, is optimistic. He regards the stock as dramatically undervalued and thinks it can recover to €24.

Meanwhile, Deutsche Bank’s plan to rid itself of its Postbank retail unit, announced by the previous management under co-Chief Executives Anshu Jain and Jürgen Fitschen in April last year and originally slated for 2016, has been delayed until 2017.

Mr. Cryan thinks the sale is strategically wrong but he will likely go along with it because it would boost the group’s notoriously weak core capital ratio by more than one percentage point, according to analysts’ estimates.

But spinning off Postbank won’t be easy because it has been hit hard by chronically low interest rates, just like other banks that earn most of their money from deposits and loans.

Postbank has managed to cut costs and sharply increased its lending to consumers, property investors and businesses, enabling it to increase its pretax profit by over a third to €582 million in 2015. But pretax profit slumped to €75 million from €131 million in the first quarter, prompting Chief Executive Frank Strauss to step up cost savings.

Deutsche Bank paid a total of €5.5 billion for Postbank, and analysts estimate that it still values the unit at €4 billion to €4.5 billion in its books.

Deutsche Bank Chief Financial Officer Marcus Schenck keeps on insisting that a number of potential buyers have expressed an interest in Postbank “even though there aren’t 20 of them.”

But analysts are certain that Deutsche Bank won’t be able to raise €4 billion, let alone more, either through an initial public offering or an outright sale. Most of them estimate Postbank’s worth to be closer to €3 billion and expect Deutsche Bank to have to make another big writedown on it.

Stewart Graham of  U.K.-based Autonomous Research estimates the bank will have to take a charge of at least €750 million.



Michael Maisch is the deputy chief of Handelsblatt’s finance desk in Frankfurt. Yasmin Osman is a financial editor with Handelsblatt’s banking team in Frankfurt. Christopher Cermak is a financial editor for Handelsblatt Global Edition in Berlin. To contact the authors:, and

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