Deutsche Bank's Inconvenient Truth

(Bloomberg) -- As Deutsche Bank AG approaches its 150th anniversary, Germany’s biggest lender is facing an inconvenient truth: it is no longer irreplaceable for the country’s economic elite.

From corporate giants to specialist engineering firms, Germany Inc.’s once-solid allegiance to Deutsche Bank is waning after years of crises stemming from efforts to emulate Wall Street investment banks, according to discussions with numerous executives.

After working with Deutsche Bank for more than half a century, “I feel genuine regret for the decline of this once so proud and trusted institution,” said Reinhold Wuerth, the 83-year-old billionaire and patriarch of building-materials maker Wuerth Group. But those woes “hardly influence our business, as there are all kinds of banking services available in the European Union,” said Wuerth, an elder statesman of the country’s vaunted Mittelstand of small- and medium-sized companies, which make up the backbone of the economy.

Deutsche Bank's Inconvenient Truth

That indifference poses a risk to Chief Executive Officer Christian Sewing’s plan to return the lender to its roots of supporting the country’s army of exporters, even if German business leaders yearn for a strong domestic bank with international reach. The bank’s declining relevance also plays into the hands of those who favor the creation of a stronger German lender through a merger with cross-town rival Commerzbank AG, a combination that is gaining the backing of some policy makers.

Wuerth’s comments are in line with those made by several other business leaders, who asked not to be identified to avoid compromising their business relationships. Many pointed to the lender’s strong transaction bank — which provides export financing and payment services — as a key reason why they want Deutsche Bank to remain strong. But most agreed that they could find other financial institutions to fill the gap, if need be.

More so than in the past, German Mittelstand companies today have a wide array of financing options, and more foreign lenders are pushing into the market. BNP Paribas SA, ING Group NV and Goldman Sachs Group Inc. have all recently announced intentions to deepen their ties with the country’s “hidden champions.” Meanwhile, Deutsche Bank’s share of the German loan market has dropped, falling to fifth place so far this year from first as recently as 2015.

Deutsche Bank's Inconvenient Truth

“The competition for Mittelstand clients has become tougher in Germany,” Stefan Bender, Deutsche Bank’s head of commercial clients in Germany, said in an interview. “That’s why we’re investing” to better serve these companies at home and abroad.

The bank is bolstering its Mittelstand coverage, which is exempt from job cuts as long as Bender and his team can hit income targets. Business in the segment has grown this year after Deutsche Bank won 4,500 new clients, a bright spot for a company that reported its weakest third-quarter revenue since 2010.

For commercial customers, the new approach has been noticeable, with Deutsche Bank staff making frequent calls and extending event invitations to woo companies that were once openly disdained as being too small, according to one executive.

“We previously lost our focus on the Mittelstand, but it has come back,” said Bender. “Our clients know we can do Mittelstand business. We now need to show that we want it too.”

But lavishing prospects with attention may not be enough. One Mittelstand client worries that Deutsche Bank’s latest cuts to its products and geographical coverage could further curtail the lender’s relevance after a painful pullback from Latin America. Sewing has repeatedly vowed to maintain a presence in the U.S. and Asia.

Deutsche Bank's Inconvenient Truth

A decade ago, Deutsche Bank was one of the world’s foremost investment banks after a stunning rise from regional lender to global player. But that started crumbling as the aftermath of the financial crisis exposed dubious deal-making, leading to crushing fines. Forced to exit activities that stiffer regulation made less profitable, the bank’s total assets fell from a peak of 2.28 trillion euros ($2.58 trillion) in 2011 to 1.38 trillion at the end of the last quarter.

A string of CEOs have attempted piecemeal reforms to lift its shrinking revenue, shedding a good part of the company’s global ambitions and retrenching to Germany. But many companies in its home country were flourishing without Deutsche Bank’s help, and the lender no longer has the network of cross-shareholdings that once guaranteed its central role in the German economy.

Deutsche Bank’s defenders warn against taking the current environment for granted. A deterioration in the country’s benign economic picture could prompt some foreign banks to ditch the German market, leaving Mittelstand companies starved for credit when they need it most. Several business leaders referred to their experience during the 2008 financial crisis to make the point.

‘Painful’ Process

Sewing — the first German national to lead Deutsche Bank as sole CEO since 2002 — is considered well-placed to turn things around, embodying the bank’s back-to-basics approach. At a high-profile conference of German business leaders in Berlin last week, he painted a folksy picture of his career. During his 29 years at the company, he’s risen from a wide-eyed intern to the head of the financial powerhouse.

As a young trainee at the 148-year-old lender, “the understanding of a global bank — that Germany needs and that should also have its permanent base in Germany — made an intense impression on me,” Sewing said. A bank is “like a spider in the web that connects customers with the market,” said the CEO, who completed his training by working with corporate clients.

Despite its current woes, Wuerth — who took over the family business at the age of 19 and built it into a global enterprise with 76,000 employees — believes “clever management” can return Deutsche Bank to health, even if the process is “painful.”

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