Deutsche Bank

The Axman Cometh

John Cryan, Chief Financial Officer of UBS after a press conference to announce the bank's annual results. The Swiss banking industry holds an estimated 4,000 billion Swiss Francs (USD 4,240 billion) in assets, more than half of it foreign, including CHF 880 billion in undeclared European assets alone, benefiting from the country's famous banking secrecy laws.
A man with someone else's plan: John Cryan.
  • Why it matters

    Why it matters

    Mr. Cryan is expected to wield the ax at Deutsche Bank, both in terms of jobs and other cost-cutting measures.

  • Facts

    Facts

    • Mr. Cryan, a former UBS banker, takes over as co-CEO of Deutsche Bank in July.
    • He will inherit a five-year plan that includes selling the bank’s retail arm, curtailing investment banking and investing in digitization.
    • By 2020, Deutsche Bank wants to spend 65 cents for each euro of revenue, compared to 85 cents today.
  • Audio

    Audio

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Although John Cryan, the newly appointed co-CEO of Deutsche Bank, will not be reporting to work until July, his calendar is already full.

After visits to the European Central Bank and the German Federal Financial Supervisory Authority, the country’s financial watchdog, his next step is to meet with rattled investors and nervous employees.

But Mr. Cryan has more on his plate than to appease the bank’s stakeholders. The former UBS banker, who is initially replacing Anshu Jain as co-CEO and then, following the departure of Jürgen Fitschen in May 2016, will become the bank’s sole CEO, has a mammoth agenda. His top priority is to flesh out the details of a strategy that the current co-CEOs have failed to deliver, angering investors in the process.

But the 54-year-old banker should not and will not be satisfied with simply working out the details. On the contrary, Mr. Jain’s recently unveiled master plan for the bank, which is supposed to apply until 2020, will have to be readjusted. The key parameters management has presented so far have not sufficiently addressed the bank’s strategic deficits.

The basic elements are correct: Selling the Postbank retail subsidiary, reducing costs, trimming back the investment bank and the regional branch network and investing in digitization are steps in the right direction. Concentrating on the premium retail banking business, strong payment transactions, a large investment management business and a more focused investment bank are all elements of the right strategy. But the plan on how to get there is still too half-hearted.

At UBS, Mr. Cryan was seen as an uncompromising hatchet man who fearlessly reduced costs.

Take costs, for example. In five years, the bank only wants to be spending 65 cents for each euro of revenue, compared to 85 cents today. It isn’t a very ambitious goal, and it’s one that many competitors have already surpassed today. The bank’s high costs have long been the biggest thorn in the side of shareholders, and the issue on which they had the least amount of confidence in the current management team.

But like the lack of progress in digitalization, this can only be partly blamed on the hapless Jain/Fitschen duo. Deutsche Bank has a deeply rooted culture of poor cost control, which ultimately goes back to the era of Mr. Jain’s predecessor, Josef Ackermann.

Unlike the current CEOs, Mr. Cryan brings a high degree of confidence to the job. At UBS, he was seen as an uncompromising hatchet man who fearlessly reduced costs.

A similarly robust approach will be called for in Deutsche Bank’s investment banking division. The current strategy calls for a net reduction in assets by €130-150 billion ($147-170 billion). Even this imprecise number seems suspicious, leading to the presumption that Mr. Jain had no intention to do anything other than treat investment banking with kid gloves, and ultimately would have fallen short of his targets.

Mr. Cryan, who unlike Mr. Jain is not from the trading world but has a background in client advisory roles, knows all too well what the trading business’s enormous problems are: Yields are slim in bond trading, the bank’s engine until now, and the bond-trading arm consumes far too much capital. This is where the ax needs to be applied more heavily.

In the future, Germany’s largest bank needs much less of its capital-hungry and low-yield trading business than the current management tried to make shareholders believe. This is especially true as the unit’s overall yield is probably enhanced artificially, because costs are bundled in a relatively non-transparent way in a central infrastructure unit.

This is not to say that Deutsche Bank will no longer need a strong capital market business in the future. But it will be one that serves the corporate and investment management customers and does not exist solely for the sake of proprietary trading or hedge fund customers.

Mr. Cryan should abandon Mr. Jain’s dream – which became a reality – of being a global superpower in bond trading. It is certainly true that bond trading accounts for the bulk of investment banking revenues. But high yields could only be achieved with an enormous leverage ratio, which would be impossible today.

Mr. Cryan should build on the investment bank’s good reputation and invest in areas that benefit customers: In merger consulting and raising capital, along with foreign currency and equity trading.

Mr. Jain is considered a rock star in the banking world. As co-CEO, he will be remembered as someone who made a lot of noise but achieved few of his goals, partly because of the difficult legacy of the Ackermann era.

Mr. Cryan is seen as someone who promises little but delivers a lot. The hope is that the bank will see less fanfare and better results under his leadership.

 

To contact the author: dschaefer@handelsblatt.com

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