Germany’s biggest lender is in the doldrums


JOHN CRYAN has spent almost three years on the thankless task of revitalising Germany’s biggest bank. Deutsche Bank’s shares fetch around €11 ($13.50) each. That is less than half their price when he became joint chief executive in July 2015 (he became sole boss 11 months later) and an eighth of the peak in Deutsche’s pre-crisis pomp (see chart). Paul Achleitner, the chairman of Deutsche’s supervisory board—perhaps sharing investors’ impatience, perhaps to shore up his own position—has reportedly sounded out possible replacements for Mr Cryan.

The two men are also said to disagree over the future of Deutsche’s investment bank, with Mr Cryan wanting to shrink it further and Mr Achleitner not. But Mr Cryan insisted in a memo to staff on March 28th that there was “no difference of opinion” over the bank’s strategy: the supervisory board (that’s you, Mr Achleitner) had given its seal of approval, too. Laid out a year ago, the strategy involved raising €8bn in equity, selling part of the asset-management division and cutting costs, as well as merging Deutsche’s two retail banks—the posh “blue” brand and the dowdier Postbank, bought from the German post office in 2008-10, which Mr Cryan had formerly hoped to sell. The corporate and investment bank would place more emphasis on serving companies (eg, merger advice, managing payments and hedging against shifts in interest and exchange rates) and become more selective in serving institutions such as hedge funds.

Some of the items on this list have been ticked off. The new shares were sold almost at once. Last month the sale of 22% of the asset manager, renamed DWS, raised €1.4bn. Deutsche’s balance-sheet looks solid. At the end of 2017 its ratio of equity to risk-weighted assets, a key gauge of capital strength, was a robust 14%.

But the rest, and restoring profitability, will take time. Mr Cryan’s target of a 10% return on tangible equity looks far off. Last year Deutsche reported an annual net loss of €497m—its third net loss in a row—after December’s reform of American corporate-tax law turned a pre-tax profit of €1.3bn red. Like other banks, Deutsche has suffered from eerily quiet trading: its fixed-income revenues plunged by 29% in the year to the fourth quarter. (Greater volatility in markets will help on this score.)

Last month James von Moltke, its chief financial officer, said that a strong euro and higher financing costs would set it back by €450m in the first quarter of 2018, compared with a year earlier. Delays in selling businesses mean that operating costs this year could be €1bn higher than planned.

There are bright spots, for example in merger advice. And the nomination on April 4th of John Thain, ex-head of Merrill Lynch, to Deutsche’s supervisory board should add expertise. But whoever is in charge, Deutsche needs to do more on costs and revenues. Last year expenses were an unhealthy 93% of income, and pay jumped from 40% of revenue to 46%. The management board went without bonuses but other bankers were paid €2bn-plus, after a deep cut in 2016.

Quite probably, Mr Cryan is on the right track—at any rate, the least bad track available. In a recent report Morgan Stanley, a bank, and Oliver Wyman, a firm of consultants, forecast that banks’ global revenues from corporate clients would grow by 4% a year in the next three years, against just 2% from institutional businesses. Even so, Morgan Stanley’s analysts expect Deutsche to keep losing market share.

America’s leading banks look better placed. They will gain from America’s corporate-tax cuts and faster loan growth, and from its rising short-term interest rates. They are in stronger shape than European banks, having reorganised themselves more quickly after the financial crisis. In the past five years their share of European investment-banking revenues has risen by eight percentage points.

Kian Abouhossein, of J.P. Morgan, argues that Deutsche may be wise to focus on serving European companies in their home continent and abroad, and cut back in America, where he estimates it made a return on equity of only 2% last year. Coalition, a research firm, says that Deutsche ranked second in European investment-banking revenues last year, but only eighth in America and joint fifth in Asia.

Such a retreat would bring Deutsche closer to its roots as corporate Germany’s house bank. But Deutsche cannot live by German business alone. Making money in a land of 1,600 banks is hard, even when you are the biggest, and especially with interest rates at rock-bottom.

Twenty years ago Deutsche had stakes in several German companies. Now those firms, like their counterparts elsewhere, can pick and choose among the world’s banks. Too big for Germany, dissatisfied with Europe alone, but trailing behind the American giants: you wouldn’t start from here. It’s a pity that Mr Cryan, or anyone daft enough to covet his job, will have to.



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