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Categorized | Currencies, Equities

Deutsche Bank: Cryan’s clean-up job

Posted on June 30, 2015

Deutsche Bank in Frankfurt©Bloomberg

Deutsche Bank’s “passion to perform” advertising slogan — translated tortuously from the original German — was never totally convincing. But now critics have started twisting it into a “passion to underperform”.

    Little wonder. Germany’s biggest bank is facing its deepest crisis of confidence in a generation. In April, Deutsche paid a record $2.5bn fine to US and UK regulators for its involvement in the Libor rate-rigging scandal. A few days later its new five-year strategy fell flat with investors. In May came a rebellion from shareholders at its annual meeting. And in June, its co-chief executives, Anshu Jain and Jürgen Fitschen, said they would step down. Deutsche Bank’s share price has stagnated over the past year, undershooting the rise of Germany’s Dax index by more than half.

    It is a remarkable reversal of fortunes. Until a couple of years ago Deutsche Bank seemed to have emerged from the global financial crisis in better shape than many rivals, thanks to shrewd management, luck and a benign regulatory environment in its home market.

    Now that tailwind has changed direction. Late last week, it emerged that the one body Deutsche could often count on for support has turned hostile. On Friday the Financial Times revealed details of a scathing report from BaFin, Germany’s financial watchdog, into Deutsche’s involvement in the the industry-wide Libor scandal. The assessment, seen by the FT, paints a damning picture of the bank’s failings and raises serious questions about its management and governance.

    Other banks have already been hit by the Libor scandal, many paying big fines and some, such as Barclays, even losing top managers. But BaFin’s criticism of a bank long synonymous with German economic prowess could not come at a worse time. For John Cryan, who succeeds Mr Jain as co-chief executive on Wednesday and will take sole charge when Mr Fitschen (who has been caught up in a German fraud trial) steps down next May, this fresh reputational blow compounds a number of operational problems facing the bank.


    Greek default, Deutsche Bank and Credit Suisse

    FT podcast

    Martin Arnold and guests discuss the potential impact of a Greek default , the German regulator’s scathing report on Deutsche Bank’s involvement in the libor scandal, and what Tidjane Thiam’s arrival as chief executive means for Credit Suisse.

    To an extent, it is the kind of challenge that this 54-year-old Briton is used to. Mr Cryan became chief financial officer of UBS near the height of the financial crisis in 2008 and spent the next three years battling to prevent Switzerland’s largest bank from collapsing. By the time he left in 2011, UBS was on its way back to financial health, and Mr Cryan had won numerous admirers.

    “UBS was lucky to have him as CFO during that very difficult time in 2008,” says a former colleague. A close friend says: “He has an enormous brain.”

    Deutsche’s beaten-down share price jumped on his appointment, suggesting that investors are optimistic. On Wednesday, he will give the first glimpse of his priorities when he sends a memo to staff outlining his early thoughts.

    “The most important thing Mr Cryan has to do is win back trust,” says Helmut Hipper, a portfolio manager at Union Investment in Frankfurt. Many investors cut their holdings of Deutsche stock in April, unconvinced by the bank’s planned new strategy and its promised
    €3.5bn of cost cuts. “He has to make it attractive to invest in the bank again.”

    Awkward questions

    BaFin’s hard-hitting report raises a number of questions for Mr Cryan. Chief among them: why did it take nearly four weeks between the bank receiving the report and Mr Jain announcing his departure? Frauke Menke, head of banking supervision at the German watchdog and the report’s author, makes it clear how little she thinks of Mr Jain, who built up Deutsche’s investment bank over a decade and was running it at the time of the alleged Libor rate-rigging.

    “I consider the failures with which Mr Jain is charged to be serious. They display inappropriate management and organisation of the business,” Ms Menke wrote. “He must be charged with the fact there was an environment . . . which favoured behaviour involving the exploitation of conflicts of interest.”

    The bank and Mr Jain reject several of the report’s findings and insiders deny that it was the cause of his exit — even if many outside observers think otherwise. As the head of a big European fund manager says: “It looks very bad for Anshu — until now it looked as if he had gone of his own accord.”

    But there are also questions for the new guard. Why did Deutsche’s supervisory board decide to give Mr Jain new responsibilities in a management shuffle in May, more than a week after it received the regulator’s findings but before the bank had responded? Veteran investment banker Paul Achleitner chairs the supervisory board and Mr Cryan sat on it for two years.

    A senior lawyer says the list of people in German regulators’ line of fire could include Mr Achleitner, who some think failed to take sufficiently swift or serious action once he learnt of the Libor manipulation. “Achleitner is somewhat exposed on this,” says the lawyer. Deutsche dismisses the suggestion and a senior executive describes the chairman as a “tremendous asset”.

    Even if there are no more top-level casualties, investors say Mr Cryan may need to instigate a management clear-out to remove the taint of the Libor scandal and signal an intent to clean up the bank’s culture.

    “The only way John Cryan can succeed is by starting with a deep clean, potentially raising capital and bringing some top new guys in,” says Davide Serra, an investor in Deutsche’s debt through his Algebris fund. “The group will be fine. It has a unique base of German and European clients that it can service around the world. But what is obvious to me is that it needs an overhaul to change the culture to a commercial bank. It should be the JPMorgan of Europe, not the Goldman Sachs.”

    Several members of Deutsche’s executive committee — one notch below the main management board — are named in a critical light in the BaFin report, including Stephan Leithner, its European chief executive; Michele Faissola, head of asset and wealth management; and Alan Cloete, the outgoing co-chief executive of Asia.

    Frankfurt prosecutors are examining the role played by individuals connected with Deutsche’s involvement in the rate-rigging scandal — the first step in a procedure that could lead to criminal charges.


    But BaFin’s report does not conclude that the management board or the executive committee directly knew of or ordered Libor rigging by the bank’s traders, nine of whom are named in the report. The bank disputes several of BaFin’s findings, including that Mr Jain may have deliberately misled the Bundesbank. The bank also says it has fired or disciplined about 30 people involved in the wrongdoing, tightened up its control and audit functions and created a “benchmark and index control group” — independent of the trading floor — to oversee rate submissions.

    Regulatory shock

    The checks and controls were a long time coming. T+hough many banks have been found wanting in their conduct and compliance, Deutsche’s lambasting at the hands of international regulators has been a shock to the system.

    For years, the bank had benefited from a benign treatment by domestic policy makers: as the country’s only bank with a profile to match the country’s economic importance, it has sometimes been a useful government ally.

    BaFin has often been supportive rather than confrontational. “The Germans have always been very lenient on the prudential side of regulation,” says a senior regulator from a rival authority. Compared with US and UK watchdogs, BaFin has been seen as toothless.

    That leniency was evident in the run-up to the crisis and beyond. Deutsche has long operated with one of the weakest capital ratios of global peers. The bank has a reputation for aggressive risk assessment, which has helped lower its regulatory capital requirements. That different approach often gave it a competitive edge on pricing.


    In 2012, regulators in the US probed whistleblower allegations that the bank had hidden up to $12bn of derivatives losses by failing to mark down the value of assets in its books in line with the slump in markets. Had it been forced to take the markdowns, critics say, the bank’s capital position would have been untenable, forcing it into a state bailout. BaFin, which had signed off on the bank’s treatment of the assets, took no further action. Yet Deutsche ended up paying $55m to the US Securities and Exchange Commission this May to resolve the allegations without admitting wrongdoing.

    But if BaFin’s latest report on Deutsche’s wrongdoing over Libor is a guide, the German regulator is shedding its old reputation for softness. Since responsibility for the safety and soundness of eurozone banks passed last year to the European Central Bank, BaFin’s role has been reduced to that of a conduct regulator, prompting some bankers to talk of competitive tension between the two.

    As a European policy maker quips: “In conduct matters, there is a Lutheran mindset that dictates there must be punishment.”

    Still universal, but smaller

    In addition to an increasingly hostile regulatory environment, Mr Cryan has some deep strategic questions to resolve. In April, when Deutsche unveiled its strategy, it promised more details within 90 days.

    Shareholders were disappointed by the lack of detail in April — one big investor described it as “the worst” strategy presentation he had experienced — but the second deadline gives Mr Cryan some scope to adapt the plan.


    The essence of that strategy is that Deutsche will continue to be a universal, globally active bank. It will still operate in the four areas that it did before: investment banking, asset and wealth management, transaction banking and retail banking. It will also slim down.

    On the retail side, it will sell Postbank, the post office bank it bought in stages from 2008. The investment bank, which has borne the brunt of post-crisis regulation, will cut its risk-weighted assets almost in half to €150bn. Across all its operations, Deutsche aims to cut its cost base by €3.5bn, or 15 per cent. Most analysts do not expect Mr Cryan to depart from these broad outlines, at least in the short run. As he cut costs, he will also need to signal a clear strategic direction and restore bruised staff morale.

    Unhelpfully, for Mr Cryan, the cloud of regulatory intervention remains. Apart from the Libor scandal, Deutsche is also facing investigations into allegations of rigging foreign exchange markets, manipulating precious metals prices and breaching US sanctions. Having to face an aggressive German regulator on top of his other challenges is the last thing Mr Cryan needs.

    European shake-up: Rivals face similar task in rebuilding brands


    Within hours of Tidjane Thiam starting as chief executive of Credit Suisse last week, a colleague joked that he should place a bet with Europe’s two other new bank bosses — at Deutsche Bank and Standard Chartered — on whose share price would do best.

    There are striking parallels between the three new faces in European banking. They are all outsiders. Mr Thiam joined from the UK insurer Prudential, while John Cryan arrived at Deutsche after a spell at the Singapore investment fund Temasek and Bill Winters came to StanChart from running his credit fund Renshaw Bay.

    The three banks came through the financial crisis in reasonably good shape compared with their rivals. But they have recently flagged and need a strategic rethink. A heavy dose of cost-cutting, a shift towards higher return activities and a drive to improve relations with regulators are expected to feature in the plans of all three men.

    Investors say Mr Cryan has the toughest job of the trio. He was already on Deutsche’s supervisory board when it signed off on the five-year strategy, outlined in April, so he is unlikely to change much.

    But it has to deal with tough competition from Goldman Sachs and JPMorgan, which are benefiting from a recovering US market. Mr Cryan, like the arrivals at Credit Suisse and StanChart, also faces concerns about his bank’s capital levels. Analysts are already speculating about who will be the first to announce a rights issue. But some investors worry that Mr Cryan lacks the leadership qualities of Mr Thiam or Mr Winters.

    “Running Deutsche Bank is one of the hardest jobs in European investment banking,” says a top 20 shareholder. “We think John will be able to rebuild relationships with regulators. But there is a residual question whether at a managerial and charismatic level he can exhibit the leadership we think Deutsche needs to achieve its targets.”