Time is running out for Deutsche Bank as investors get twitchy

Shareholders in Deutsche Bank are getting twitchy. Last month Germany’s Handelsblatt business daily wrote of investors’ “deep dissatisfaction” over the performance of the bank. Over the weekend one of the country’s biggest asset managers, Union Investment, told the Sunday Times that if there was no improvement over the next six months, “pressure will mount” on management.

The reason is straightforward. Deutsche’s stock is close to record lows. It has underperformed almost all its peers (bar Barclays) so far this year. And it is down by a half since John Cryan became chief executive in the summer of 2015.

Last week, rating agency Fitch cut the bank’s credit rating from A- to BBB+, saying it expected no “clear signs of franchise recovery this year” and a decline in net profits under the weight of ongoing restructuring costs. The week before, research house Autonomous published a damning report, saying the bank was “beyond repair” thanks to under-investment in technology, low staff morale, a tarnished brand and the fact that regulatory demands have ruined its old business model of relying on cheap debt and minimal equity to back the balance sheet.

The symptoms of Deutsche’s ills are undeniable. But the diagnosis — blaming the capable Mr Cryan — is simplistic.

Yes, he has made mistakes: reversing strategy after barely a year; hurting morale by speaking openly about the inevitability of mass job losses; and failing to articulate an inspiring vision for the bank. But Deutsche’s main woes have flowed from problems Mr Cryan inherited: a legacy of legal cases, most notably over the mis-selling of asset-backed securities in the run-up to the financial crisis, and a chronic shortage of equity capital. He has fixed both.

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When a threatened $14bn penalty by the US Department of Justice was mooted a year ago, investors took fright, triggering panic that Deutsche might not survive. That in turn sent hedge funds and other clients fleeing. Cutbacks in emerging markets, such as the withdrawal from Russia (prompted by other legacy legal issues) have hurt market share and driven down revenue in one of Deutsche’s strongest historic franchises: foreign exchange.

It would seem fair to stick with a chief executive who is not principally to blame for such woes. It would also be in the bank’s pragmatic self-interest — at least for now. There are three credible internal succession candidates, but two of them (investment bank chief Marcus Schenck and finance director James von Moltke) have only just started in their roles. That leaves Christian Sewing, who heads the retail bank and along with Mr Schenck is a deputy co-CEO. But if Mr Cryan — a former UBS investment banker — has problems motivating Deutsche’s crucial investment banking division, then it is not obvious Mr Sewing would be the fix.

For the time being, that logic may be enough to sustain the backing of Deutsche’s top shareholders. Privately, China’s HNA, with nearly 10 per cent, has indicated its support for Mr Cryan, while the Qatari royals, led by former prime minister Sheikh Hamad Bin-Jaber al-Thani, or HBJ, is known to have a long-term view. By comparison the criticism of Union, which has less than 0.5 per cent of Deutsche, may carry minimal weight.

The official line from both Mr Cryan and his supervisory board chairman Paul Achleitner is that the CEO will continue in his job until his contract ends in 2020. By then, Deutsche should be looking far healthier. Interest rates should be higher, boosting margins. The drastic cost-cutting should have fed through to the bottom line. Brand scars should have healed, helping the bank to win back lost clients. And all of that should finally boost the share price.

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This column focused on Deutsche in February 2016, and took the bear case on five grounds. 1: The decline in its core trading business, in part because of low morale. 2: The absence of a compelling alternative business to pivot towards. 3: A bleak macroeconomic outlook. 4: Looming litigation costs. 5: That Deutsche is not, as some have suggested, a takeover target. Between then and now Deutsche’s stock fell to a perilous all-time low a year ago, before recovering to those same February 2016 levels. Points 3 and 4 look rosier today. The others do not. If Mr Cryan is to survive and Deutsche is to prosper, he must stop the rot in trading and articulate an inspiring strategy. Germany and its eponymous bank deserve better.

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