Decisive Months

Deutsche Bank sorely needs a good start to 2018

Deutsche Bank CEO Cryan attends the German Banking Congress in Berlin
Living on a prayer? Deutsche Bank CEO John Cryan may be mulling his future. Source: Reuters

“May you live in interesting times” sounds like a rather dull happy new year’s greeting. It was actually popularized as an old Chinese curse in a speech by John F. Kennedy (“Like it or not, we live in interesting times”). That’s a sentiment Deutsche Bank and its Chief Executive John Cryan would no doubt agree with. The bank’s past few years have been nothing if not interesting.

2018 began with another thud. At 4 p.m. local time Friday, Germany’s largest bank surprised investors with a statement that it would post a slight annual loss for 2017. This came after the bank had already lost billions of euros in 2015 and 2016. The main cause, oddly enough, was Donald Trump’s US tax reforms, which will cost the bank some €1.5 billion in writedowns (although this is hardly the first time Mr. Trump has been a thorn in the bank’s side).

But daily operations were also to blame, particularly the ongoing weakness in the all-important fixed income trading business. Nor did the bank make as much progress as hoped in its cost restructuring in the fourth quarter. It was all a bit much for Union Investment, an influential German fund manager and Deutsche shareholder.

2017 had started so full of hope, but the positive mood didn't last long.

“Until now we have had no indications that the bank’s strategy is working and is profitable in the long run,” fund manager Ingo Speich told Handelsblatt after the Friday bombshell. It was critical for the bank to show signs of “at least a stabilization” of its business operations in the near future, he added.

By contrast, 2017 had been a relatively uninteresting year by Deutsche’s standards, at least compared to 2015, which saw the firing of former bosses Anshu Jain and Jürgen Fitschen, and 2016, when Germany’s largest bank was mired in perhaps its deepest-ever crisis of confidence. But peace and quiet have their pitfalls too. Indeed 2017 was a little too quiet for Deutsche’s largest shareholders. On the last trading day, the bank’s share price closed at €15.87, just about the same level as when the year began.

That year had started full of hope: 2017 began with news that Deutsche had finally settled a major legal headache by agreeing a deal with the US Justice Department over bad mortgages in the financial crisis. Later, CEO John Cryan managed to raise another €8 billion in a capital increase. Together, the moves were designed to finally put an end to any lingering doubts about the bank’s financial stability.

The positive mood didn’t last long, however, as it became clear just how difficult it would be for the bank to implement a new long-term strategy, how far it lagged behind major competitors in the United States and how long it would take to win back the trust of clients that abandoned the bank during its troubles of 2016.

Add another unknown quantity to that latent distrust: US financial investor Cerberus.

It’s an unhealthy mix of challenges that could soon pose a threat to Mr. Cryan. Sure, his critics understand that Deutsche Bank can’t be rebuilt in a year, but patience among the bank’s biggest shareholders is wearing thin. It’s true that most investors had already scaled back their hopes for 2017 (even if Friday’s news proved a final nasty surprise). What matters now is what happens in the first half of 2018 – even the first three months, which are traditionally the bank’s strongest. This is what could determine just how “interesting” a year 2018 will be for John Cryan.

The question that Deutsche’s largest shareholders (including Chinese conglomerate HNA and Qatar’s ruling family) are asking themselves: Was Mr. Cryan too optimistic at the start of 2017? That suggests a further hard question, namely whether the man famed as an expert crisis manager is actually the best person to set the bank on a path of real long-term growth.

Add to those misgivings another unknown: US financial investor Cerberus took a stake of at least 3 percent in the bank in November. Known as a hard-nosed restructurer, Cerberus is hardly going to sit back and wait for Deutsche’s shares to recover. Though Ceberus’ CEO reportedly backed Deutsche’s embattled boss in a visit to Germany last month, this remains an uncomfortable situation for Mr. Cryan, who isn’t exactly known for cultivating close and proactive relationships with the bank’s shareholders.

So where would the bank’s Chairman Paul Achleitner start if he was suddenly forced to look for a new chief executive? Two internal candidates ready for the job are Mr. Cryan’s deputies Christian Sewing, who is in charge of the private banking business, and chief investment banker Marcus Schenck. Neither seems to yet enjoy the confidence of the bank’s largest shareholders, but they still have time to prove themselves.

Both deputies will be key to the bank’s restructuring this year. Mr. Schenck’s job is to restore the bank’s traditional strength in the trading business. If he succeeds, that would quickly shift the dour mood of investors. Perhaps Mr. Sewing has the more complex task, which involves integrating the retail bank Deutsche Post into his operations. The on-again off-again merger will add 20 million clients to the rolls and once again make Deutsche a giant in its home market. A tremendous challenge, but also a tremendous opportunity.

Friday’s flash of bad news makes 2018 way too interesting already for Mr. Cryan and his colleagues. Big questions about the bank’s strategy and its leadership are now firmly on the table – and it’s only early January.

To contact the author: maisch@handelsblatt.com

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