For the better part of a decade, Deutsche Bank AG has been trying to retool itself for a tamer era of more regulation and less risk-taking. Now, as Germany’s biggest lender installs yet another chief executive officer, it’s facing the same old existential question: Should it focus more on rebuilding its domestic banking franchises, rather than continue trying to be Europe’s world-beating answer to Goldman Sachs Group Inc.?
Shareholders have been waiting years for Deutsche Bank to figure out what kind of bank it wants to be. Its European rivals have emerged from the post-global crisis gloom poised to reap the benefits of a growing economy. France’s BNP Paribas SA said in February it may beat its profitability target in 2020 thanks to rising loan volumes in its home market. Swiss banking giants UBS Group AG and Credit Suisse Group AG have refocused on wealth management. And in Italy, the shares of top lender UniCredit SpA have returned about 25 percent in the last 12 months. Over the same period, the Euro Stoxx Banks Index has risen modestly—and Deutsche Bank shares are down about 25 percent.
The latest turmoil follows a drop in revenue in the final months of last year and a surprise decision to postpone a cost-cutting goal. Chairman Paul Achleitner and his fellow board members decided to oust British CEO John Cryan after less than three years and replace him with Christian Sewing, 47, a Deutsche Bank lifer. At the same time, Marcus Schenck, the deputy CEO in charge of the corporate and investment bank—and a onetime heir apparent to Cryan—quit the company.
Sewing is a lanky German who commutes to the Frankfurt headquarters from a small city close to where he grew up. He’s been a deputy CEO and managed consumer banking operations. His selection is being read in Germany as a sign that Deutsche Bank will be less ambitious in international investment banking sector. A shift was already under way: A review of the investment bank, known internally as Project Colombo, is supposed to determine which businesses to cut and which to support. But the sudden change at the top doesn’t solve a basic conundrum for Deutsche Bank. Much as it might like to refocus and slash costs, the corporate and investment bank accounts for more than half of revenue.
Sewing has said investment banking is still important for Deutsche Bank, and Germany’s finance minister, Olaf Scholz, told reporters after an April 11 cabinet meeting that the country needs a bank that’s a global player. Many are watching the U.S. investment banking operations, which accounted for 35 percent of the division’s €14.2 billion ($17.6 billion) in global revenue in 2017 and has been cited by analysts as ripe for restructuring. “The U.S. investment bank has to be refocused,” says Ingo Speich, a portfolio manager at Union Investment Privatfonds GmbH in Frankfurt, which holds shares in Deutsche Bank.
Achleitner said in a statement that Cryan had failed to move quickly enough in executing the turnaround. But Cryan did make progress on key features of his plan. In December 2016 he settled a toxic mortgage case in the U.S. for $7.2 billion. It could have been much worse. The U.S. Department of Justice had initially asked for $14 billion—a number big enough to push the bank’s share price to a record low and trigger an exodus of client money. The lower settlement paved the way toward better relations with American and German regulators and buoyed the beleaguered stock price.
Cryan raised €8 billion in a share sale early last year and spun off the bank’s asset management unit in March. In jettisoning Cryan so unceremoniously, Achleitner appears to be consolidating power. Not all investors are happy to see that. “It’s deeply troubling,” says Barrington Pitt Miller, a portfolio manager with Janus Henderson Group Plc, an investment firm that holds shares in Deutsche Bank. “The strategy under the chairman has not worked.” Deutsche Bank’s stock has fallen sharply during his tenure.
Unlike some peers, Deutsche Bank can’t fall back on a domestic bank generating big profits. The German retail banking industry is a patchwork of state-owned regional lenders, mutualised credit providers, and commercial banks, all of which eke out earnings in a country that largely shuns debt. That’s why Deutsche Bank, back in the 1990s, looked beyond its role as a handmaiden for German industry and became a force in global investment banking. By making acquisitions and poaching talent on Wall Street and in London, Deutsche Bank did crack the top tier, notably in fixed-income markets. Yet the institution’s swashbuckling ways led to a spate of legal scandals.
Now Achleitner is trying to bring the institution full circle. In 2016 he and Cryan launched an initiative dubbed Project Oak Tree—the company seems to like code names—to win more lending and underwriting business from German companies and expand its Deutsche Postbank franchise in the country. “The bank is now more strongly led from Germany,” Achleitner told the German media. “That is important for the day-to-day operations.”