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Unprofitable Deutsche Bank faces multiple challenges


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Investment Banking Essentials Newsletter April Edition - 2022


Banking Essentials Newsletter April Edition - 2022


Investment Banking Newsletter April 2022

Unprofitable Deutsche Bank faces multiple challenges

Chairman PaulAchleitner has received the backing of the ruling family of Qatar, a move thatunderlines the challenges facing the German bank.

"Theleadership qualities of Dr. Achleitner remain an important factor for ourinvestment decision and support," said Paramount Services Holdings, one ofthe Al-Thani family's investment companies, in response to a media reportsuggesting Achleitner's term of office would not be extended beyond 2017. The Qataris hold 6.1% ofDeutsche Bank through two investment vehicles, making the family thesecond-largest shareholder.

Thewithdrawal of Qatari support brought to an end the joint leadership of AnshuJain and Jürgen Fitschen. In an interview, Christopher Wheeler, a bank analyst atAtlantic Equities, suggested the Qatari statement may not be good news forAchleitner as it could be "a football manager's vote of death."

TheFrankfurt-based bank is struggling with tough markets and questions over itsrestructuring. It is responding to the challenge through a series of interviewsand promises of improvement.

"Wewant to change our business culture as quickly as possible," Chief AdministrativeOfficer Karl von Rohr told Börsen-Zeitungin an interview published March 25. The comment followed a significantreshuffling of personnel in compliance and regulatory affairs that has seen foursenior individuals leave the bank in relatively short order. Cultural change inbanking is, however, a big demand and Von Rohr admitted that such change couldtake the best part of the decade.

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DeutscheBank is enduring a very rough period as new Co-CEO John Cryan restructures thebusiness.

Thebank had a very tough fourth quarter of 2015, registering a net loss of morethan €2 billion, and faces significant challenges to revenues, costs andcapital. There were worries earlier in 2016 about whether it could meet itspayments on Additional Tier 1 capital, which hit its shares.

Theplanned sale or IPO of DeutschePostbank AG, which was intended to cut risk-weighted assets andstrengthen capital, is now likely to be delayed until 2017. The capital question and the threatof equity dilution will not disappear soon as long as the bank continues to beunprofitable.

"Ourproblem as a bank was and remains … a lack of profitability," Cryan saidMarch 16 at a Morgan Stanleybanking conference. "We said this year is notgoing to be a profitable year. We may make a small profit or we may make someloss, we don't know.

Theneed for change is underlined by the ongoing costs of litigation thatconference participants highlighted as a key issue for the bank's shares. Cryanresponded by observing that a deal in the U.S. over mortgages is expected thisyear and would produce the largest legal bill. Once that is paid, and oncecomplex and obscure legal issues in Russia are settled, Deutsche Bank might bepast the worst litigation issues.

Thekey long-term question remains when and whether Deutsche Bank will start toprove the value of its business model and of its continuing commitment toinvestment banking.

Revenuesboth from fixed income andequities were weaker than many rivals in the fourth quarter. Thefirst quarter of 2016 has been tough for Deutsche Bank, along with otherinvestment banks. Cryan said new regulation was adversely affecting marketmaking by cutting capital and reducing profitability in certain business lines.

"Wethink we should reduce the engagement in market making and generally sales andtrading and fixed income products to meet our capital demand," Cryan said,stressing that volumes and activity levels have been low in the first quarter.He said negative interest rates were also "a big drag" on profitabilitybecause Deutsche Bank has very high levels of liquidity.

Atthe same time, Deutsche Bank is expanding in its equities business, in a toughclimate. Atlantic Equities' Wheeler noted that cash equities were a relativelyhigh-return, low-capital-cost business. With this, Deutsche Bank looks to beoffsetting its shrinking fixed-income business.

JustifyingDeutsche Bank's ongoing, if reduced, commitment to investment banking will be achallenge in Germany. For decades,the firm has struggled to blend Anglo-Saxon investment banking culture withGerman retail and commercial banking, Wheeler said. He observed that the"German cadre are still very skeptical of their involvement in investmentbanking and the Anglo-Saxon approach." Achleitner, he said, is not helpedby being a former Goldman Sachs man.

Theleadership has been entrusted to Cryan alone, a deeply undemonstrativeinvestment banker who was formerly at UBS Group AG. He is seen in Germany as being verydifferent from his CEO predecessors Josef Ackermann and Jain. Unlike Jain, hespeaks acceptable, if somewhat hesitant, German.

"Avery stark change has happened," Christian Hamann, a bank analyst atHamburger Sparkasse, said in an interview. "The image which is now beingpromoted is to make everything more boring and more controlled. That is a realcontrast."

Fitschenwill cease to be co-CEO at the end of May. He is set to be replaced as theGerman face of Deutsche Bank — but not as co-CEO — by Christian Sewing, whoheads the private client business of Deutsche Bank.