Handelsblatt Explains

Why Deutsche Bank Is Becoming More German

File photo of former Zurich Financial Services Group CEO Josef Ackermann attending his company’s annual general meeting in Zurich
From boastful to sly to cautious, Deutsche Bank's last three CEOs. Source: dpa Picture Alliance, Bloomberg, Getty Images [M]

For several years it was one of Deutsche Bank’s most awkward rituals. Anshu Jain, an Indian-born British citizen who was co-CEO from 2012 to 2015, would address shareholders at the annual general meeting in English, but with his microphone switched off so the speech could be simultaneously translated and broadcast for the German-speaking crowd in Frankfurt. Many in the audience saw it as a sign of just how far Germany’s largest bank had drifted away from its homeland.

Since July 2015, another British-born CEO has been at the helm. But John Cryan speaks German. And he’s singing a very different tune: He recently promised employees that Deutsche’s focus in the coming years will be its business back home, in Germany. After more than two decades of brash foreign expansion that turned it into Europe’s largest investment bank, Deutsche is thus quietly returning to its roots. Last year it fell out of the top five in a ranking of global investment banks. That might seem like a bad thing, but it could be the bank’s only hope of survival over the long term.

German bankers, once notorious for their conservatism, learned to love the high life of Wall Street.

Deutsche Bank was never meant to be a purely domestic German bank. From its founding in Berlin nearly 150 years ago, its mission was to finance German exporters and help them expand abroad. At the time, this financing was dominated by British merchant banks, and Deutsche wanted to challenge the Anglo-Saxons. Of its first five branches, three were located abroad – in Yokohama, Shanghai and London.

Deutsche Bank subsequently rose and fell with the country itself. Before the First World War, as Germany’s power grew, so did Deutsche. But then two world wars nearly destroyed the bank. Like many German firms, it was complicit during the Nazi years, taking over rivals in occupied territories and helping Hitler’s regime expropriate more than 350 Jewish businesses. Because of those Nazi ties it was disbanded after the war – nationalized in eastern Germany and broken into ten distinct pieces by the Allies in the west.

But like Germany, the bank quickly rose out of the ashes. By 1957 Deutsche had convinced the Allies and the West German government that it should become a single bank again, based in Frankfurt. As such it played a crucial role in Germany’s “economic miracle,” taking stakes in, and seats on the supervisory boards of, some hundred German exporters. That web of relationships became known as Deutschland AG (or “Germany Inc.”).

But in the 1970s Deutsche began straying from its roots. New and complex investment-banking products became fashionable, and Deutsche wanted a piece of that Wall-Street action. So it opened its first post-war foreign branch in London in 1976 and a branch in New York three years later. It bought Britain’s Morgan Grenfell in 1989, and America’s scandal-prone Bankers Trust in 1999.

In those years German bankers, once notorious for their conservatism, learned to love the high life of Wall Street. The embodiment of that Zeitgeist was Josef Ackermann, a flamboyant Swiss banker who was CEO of Deutsche from 2002 to 2012. Mr. Ackermann became infamous for promising that the bank would make a 25-percent return on investment, an outrageous boast. In another act of hubris in 2004, he flashed a victory sign at the start of Germany’s biggest-ever corporate trial (he was acquitted two years later).

JAHRESRUECKBLICK 2004 JANUAR
Former Deutsche Bank CEO Josef Ackermann's boastful victory sign at the start of a corporate trial turned many Germans off of Deutsche Bank. Picture Source: AP

Deutsche’s excesses and foreign adventures continued even after the 2008 financial crisis and into the reign of Anshu Jain. It is only recently that these sins have come back to haunt it. Deutsche has agreed to pay nearly €15 billion in fines and settlements for legal wrongdoing in just the past five years. Its punishments included a $2.5-billion fine for manipulating the interbank interest rate called LIBOR and another $7.2 billion for hawking dubious mortgage-backed securities in the American housing market. The bank was repeatedly criticized for not cooperating with authorities. Amazingly, Deutsche’s traders in London and Moscow still kept up a Russian money-laundering scheme well into 2014. All this ultimately cost Mr. Jain his job.

So now at last Deutsche wants to make a clean cut with this past, and what Germans consider a Wall Street mentality. For John Cryan that means taking the bank back to its German roots. He may be British, but he has a German earnestness about him and comes from the relatively conservative world of consulting. He is less interested in investment banking, where growing capital requirements and paper work are making profits more elusive. He even accepts that Deutsche might shrink, for the lower that Deutsche slips on the list of banks considered “too big to fail,” the less cash it is required by regulators to keep in reserve.

The good news is that, even as it expanded abroad, Deutsche Bank always maintained a strong presence in Germany (see graphic below). In 2008 it quietly bought Postbank, a German retail lender, which now fits into Mr. Cryan’s revised home-base strategy.

Mr. Cryan’s contract runs until 2020, and the odds are that the bank’s next leader is a German again. Two princelings, Christian Sewing and Marcus Schenck, were named co-presidents in March. Both are German and have a more conservative reputation. “The German faction has won a battle,” said Dieter Hein, a banking analyst at Fairesearch. Everything suggests that Deutsche Bank will, after 150 years, again become a deutsche bank.

18 p33 DB – Revenues by Region-01

Christopher Cermak is an editor with Handelsblatt Global in Berlin, covering primarily finance and economics. To contact the author: cermak@handelsblatt.com