Deutsche Bank’s Lost Decade Haunts Sewing as Key Overhaul Nears
(Bloomberg) -- Christian Sewing has one more shot to reverse Deutsche Bank AG’s free fall as he prepares to announce “tough” cuts to the investment bank. It’s a daunting task.
The chief executive officer is zeroing in on reductions to the trading unit that may result in the shuttering of U.S. equities trading, the creation of a non-core unit to wind down as much as 50 billion euros ($56 billion) in unwanted assets, and cuts to the rates business, people familiar with the matter have said. He is also considering a management shakeup to replace the head of the investment bank, the top compliance officer and the finance chief.
The changes are shaping up to be the boldest move yet by Sewing, but analysts have questioned whether they would be enough. Over the course of a decade, the 149-year-old behemoth has gone from a top global investment bank to sick man of European finance. Five chief executives have so far failed to prepare the operation for a world of stricter regulation and more challenging markets, raising questions about its future.
Here’s a look at the long series of missteps that have left Germany’s largest bank in a precarious bind:
Deutsche Bank’s string of failed turnaround efforts is fueling concern inside the German government. Encouraged by the finance ministry, Sewing holds official merger talks with Commerzbank AG -- and even unofficial ones with UBS Group AG -- but decides against a deal. Instead, he pledges more “tough cuts” to the investment bank as he addresses frustrated shareholders at the annual general meeting in May.
The shares fall to a fresh record low before the meeting, leaving them down more than 90% from the peak before the financial crisis. The bank raised almost 30 billion euros from investors over the past decade, yet its entire market value has slumped to less than half that amount. Investors back Sewing with just 75% of the votes, Chairman Paul Achleitner with even less. Sewing now has the “toughest job in European banking” as he seeks to deliver a decisive -- and likely expensive -- restructuring to investors reluctant to cough up any more cash.
After posting three straight annual losses and admitting that he may miss his target for lowering costs, Sewing’s predecessor John Cryan is ousted in a weeks-long leadership struggle that conveys a sense of chaos in the upper echelons of the bank. Sewing soon announces a fresh turnaround plan, pledging to cut at least 7,000 jobs and scale back investment banking areas such as U.S. rates trading, the corporate finance business in the U.S. and Asia, and parts of the equities business.
Yet after years of piecemeal adjustments, the bank is stuck in what Chief Financial Officer James von Moltke calls a “vicious circle” of declining revenue, sticky expenses, a lowered credit rating and rising funding costs. Sewing accelerates cost cuts and manages to post the first annual profit in four years. Growth, however, remains elusive: Television footage of police raids at its Frankfurt headquarters damage efforts to win back clients, as the bank’s history of misconduct and lax controls comes back to haunt it once again.
Deutsche Bank taps investors for 8 billion euros in new money, the fourth time since 2010 that it’s raising capital. Cryan reverses his previous turnaround plan that had called for a sale of the consumer banking unit Deutsche Postbank AG. Now he wants to integrate it and instead sell a piece of the asset management business to help raise cash. The bank identifies more assets to wind down but once gain shies away from deeper cuts to the investment bank, let alone shutting down entire parts of the trading unit.
Cryan does implement an unprecedented cut to the bonus pool that helps bring down costs while creating deep dissatisfaction inside the bank. The CEO says the bank is ready to return to controlled growth, though that remains wishful thinking. Investors signal they may stop supporting him unless performance improves by the time of the next shareholder meeting. Cryan hires former Goldman Sachs Group Inc. partner Peter Selman out of retirement to turn around the equities business.
Deutsche Bank’s woes are exacerbated as the U.S. seeks $14 billion to settle a probe into the bank’s role in selling mortgage-backed bonds that were blamed for contributing to the 2008 financial crisis. That spooks clients, who worry about its strength as a counterparty. The firm suffers its worst hemorrhage of liquidity since the crisis, with private banks and money managers at one point pulling $10 billion in a single day.
The company settles the probe months later for $7.2 billion, but the liquidity scare drives home just how damaged the franchise has become after years of botched turnaround efforts. Even before that episode, continued capital concerns and the turmoil caused by the Brexit vote had weighed on the stock. Cryan holds exploratory talks about a takeover of Commerzbank, but the companies decide against pursuing formal negotiations at that time to focus on their separate restructurings.
It’s the last year under Anshu Jain, the former investment bank head who’s been co-CEO since 2012. Deutsche Bank is the least loved stock of all global investment banks, and a record fine to settle a probe into manipulation of benchmark interest rates isn’t helping. Jain concludes a six-month strategy review with a plan to sell the Postbank consumer operations and even considers exiting consumer banking altogether, though that idea is quickly dropped. Investors criticize the announcement, which also includes a proposal to shrink the investment bank, for its lack of detail and lowered profitability target.
Less than two months later, Jain is replaced by Cryan. The new CEO quickly unveils his own turnaround plan, announcing a net 9,000 job cuts. Cryan says his vision is “all about execution” of the five-year strategy of his predecessor. "Deutsche Bank does not have a strategy problem,” he says at the time. Chairman Achleitner claims it’s one of the most “fundamental” reorganizations in the company’s history. Shareholders once again are puzzled by the lack of details on how the bank wants to return to growth.
Jain raises 8.5 billion euros to end concerns about capital, the second time he’s tapping investors. He pulls out of trading commodities and credit-default swaps on individual companies. But while competitors are making deeper cuts into capital-intensive debt trading, Jain -- who has called Deutsche Bank the only “significant European global firm left standing” -- doubles down on the business. He announces another expansion for the bank’s U.S. operations, which would rack up 3.8 billion euros in losses over the next four years.
Jain’s past as a rainmaker for the investment bank, meanwhile, catches up with him as more investigations and misconduct cases surface at the company. Industrywide probes into the alleged manipulation of interest rates and currencies inflate the bank’s legal bill, which will eventually reach $18 billion over the decade following the financial crisis. The alleged improprieties strain the balance sheet, share price and relations with regulators.
Jain, who had indicated he didn’t want to raise capital, taps investors for 5 billion euros as regulatory requirements increase. The move briefly puts to rest concerns about Deutsche Bank’s capital strength, but soon legal bills start to mount as investigations that started with the U.S. probe into the sale of mortgage securities spread to benchmark interest rates related to Libor, violations of U.S. embargoes, and rigging of foreign exchange markets.
To help meet regulatory requirements, the bank plans to shrink its balance sheet by 250 billion euros. It also starts to move jobs from expensive locations such as New York, London, Singapore and Hong Kong to cheaper ones, while sticking to its larger investment banking ambitions. But the measures prove too little too late.
It’s the end of an era as Josef Ackermann hands over the reins. Jain becomes co-CEO together with Juergen Fitschen, and Achleitner takes over as chairman. Within weeks, the new management team realizes it has to trim the securities unit as Europe’s sovereign crisis rages on and tougher capital requirements loom. Jain and Fitschen announce the first deep round of cuts at the investment bank, with 1,500 jobs going at the unit and another 400 elsewhere.
By the time they present the results of their strategy review in September, it’s clear more cuts will be needed. The bank sets up a “non-core” unit to accelerate the disposal of risky assets, and it reviews compensation to achieve “behavioral change” after becoming a target in the scandal over manipulations of benchmark interest rates. But the new CEOs still believe they can take market share in investment banking as rivals scale back. Jain predicts new regulations will trigger a wave of consolidation that “only a few strong, large universal banks” will survive, including Deutsche Bank.
Ackermann, a critic of proposals to limit banks’ size, turns Deutsche Bank once again into Europe’s largest lender by assets, with a balance sheet that’s about 40% larger than in 2006. But it’s also one of the continent’s most leveraged and least capitalized. That’s making earnings more volatile and dependent on market swings, at a time when Europe’s sovereign debt crisis rattles investors.
By October, Deutsche Bank has to scrap its profit forecast and announces 500 job cuts, the first in a long series of firings to right-size a bank that’s become too stretched amid a changing regulatory environment and new market challenges. As of yet, though, there’s no talk of scaling back the lender’s global ambitions. “We have built an excellent platform to continue on the successful path of recent years,” Ackermann says in early 2012, at his last annual press conference as CEO.
Deutsche Bank agrees to buy Postbank, in which it already holds a minority stake. It’s part of a strategy by Ackermann to diversify, but it will be years of flip-flopping before the business is actually integrated. To finance the deal, Deutsche Bank announces its biggest share sale ever, raising about 10.2 billion euros. Some of that money is already earmarked to help meet new regulatory requirements.
Revenue from trading securities, meanwhile, rises to an all-time high as Ackermann continues his drive to build up the investment bank. But calls for stricter regulation are gaining momentum, with the U.S. going aggressively after banks for selling securities that contributed to the financial crisis. New capital rules threaten to hurt Deutsche Bank more than rivals because it depends more on fixed-income trading.
Ackermann has led Deutsche Bank relatively unscathed through the financial crisis. Now he wants to “profit from the opportunities of a new era.” He plans to increase the profitability of the investment bank, bring down costs as a share of revenue, extend market leadership at home and grow in Asia. He targets a pretax return on equity of 25%, an ambitious goal that German politicians condemn, saying it encourages employees to take too much risk.
The CEO, who rejected state aid during the crisis, brushes off the criticism because he sees an opportunity to grab market share from weakened rivals. He sets another ambitious target, for pretax profit of 10 billion euros by 2011. But new rules will soon make capital intensive investment banking more expensive, and some analysts already predict that the bank may need to raise billions. Deutsche Bank says it doesn’t plan a capital increase except perhaps for further acquisitions.
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