Deutsche Bank Drastic Overhaul Set to Return Lender to Roots
Deutsche Bank Drastic Overhaul Set to Return Lender to Its Roots
(Bloomberg) -- One year ahead of its 150th anniversary, Deutsche Bank AG is returning to its roots.
The era of going head to head with international banking giants in a high-risk, high-bonus game of global finance is ending as the bank goes back to what it was created for in the late 19th century: serving Germany’s big companies.
Chief Executive Officer Christian Sewing is set to present the lender’s most sweeping restructuring in recent history on Sunday. It will sever many ties with institutional clients -- one of the bank’s key income sources -- while seeking to boost its appeal to domestic corporations.
He also plans to slash headcount, drastically cut securities trading outside Europe, create a new division for transaction banking services and another unit to hold unwanted assets as well as shake up the bank’s top leadership and cut the balance sheet, people familiar have said.
“It’s a difficult adaptation process within Deutsche Bank,” Annegret Kramp-Karrenbauer, the head of Germany’s largest political party CDU and a contender to succeed Chancellor Angela Merkel, said Saturday in a Bloomberg TV interview. “All those responsible are currently trying with much focus and responsibility to move along, and I really hope that this process leads to success.”
The radical move wasn’t Deutsche Bank’s first choice. The company went through a series of less severe turnaround plans -- and top managers -- in search of a plan that would improve its persistently low profitability. That has pushed the share price from one record low to the next, deeply frustrating shareholders and even alarming regulators and politicians.
Investment bank chief Garth Ritchie is leaving at the end of the month, the bank said. Retail head Frank Strauss and Chief Regulatory Officer Sylvie Matherat are also set to depart, people familiar with the matter have said. Several executives below the board are likewise being dismissed or leaving. Chief Financial Officer James von Moltke is among the key executives set to remain, after also having been seen as at risk of losing his position.
The investment bank is a key focus of the revamp. The unit, which accounts for roughly half of Deutsche Bank’s revenue and which was a major actor in its downfall, will be broken in two. The transaction bank will be lifted out and merged with the commercial clients segment that’s currently within the retail division, people familiar with the matter have said.
The change is designed to accelerate the shift away from acting as the first port of call for institutional clients such as asset managers and hedge funds toward selling cash management, trade finance and hedging products to corporate clients. The new division, to be lead by current transaction bank head Stefan Hoops, will be at the heart of the lender’s future business model.
The securities business will be shrunk, perhaps drastically. Sewing wants to slash equities trading and parts of the fixed-income business. Those assets will be placed in a non-core unit to sell or wind them down. The U.S. operations will be particularly hard hit, with the bank getting ready to start rolling out job cuts on Monday, people familiar with the matter have said.
The decision to pull the plug on a big part of securities trading effectively ends a 30-year effort to become a global trading powerhouse that kicked off when Deutsche Bank took over London-based investment bank Morgan Grenfell. That deal, and the subsequent acquisition of U.S.-based Bankers Trust a decade later, briefly turned the German lender into the world’s biggest financial services company and set it on a course to become the largest buyer and seller of fixed-income securities as well.
The expansion eventually ground to a halt and then shifted into reverse at an accelerating pace as tougher regulation after the financial crisis rendered many trading businesses unviable. Meanwhile, a failure to root out shortcomings in its self regulation led to a string of legal proceedings that have cost billions of euros in fines and settlements and continue to hang over the bank to this day.
A rapid succession of CEOs tried to turn the bank around -- Sewing tried out his own plan last year -- but all their efforts fell short. A crisis of confidence three years ago pushed the bank’s funding costs well above those of the competition, eliminating what had been a crucial advantage underpinning Deutsche Bank’s growth in trading. The bank never managed to recoup all of the money that hedge fund clients pulled during that crisis.
Big Losses
Unlike his predecessors, Sewing decided that Deutsche Bank can no longer afford to subsidize the unprofitable parts of the investment bank while it waits for better times. The business generated a loss of about $750 million last year in equities trading alone -- on about $2.2 billion in revenue, people familiar with the matter have said.
Shareholders will be asking how much and how quickly Sewing’s new focus on old strengths will improve profitability. Just putting the plan in motion will cost billions of euros as severance pay and other expenses rise, probably forcing the bank to scrap its profitability target for the year, people familiar have said.
Still, investors seem to like the details of the restructuring plan that have trickled out so far. The cost of insuring against the bank’s credit default has fallen recently and the announcement on Friday of Ritchie’s departure was followed by a surge in the share price as investors saw it as a sign that Sewing is indeed getting ready to make a radical change.
When the group of bankers that would create Deutsche Bank came together in January 1870, their statute said the bank’s purpose would be “to transact banking business of all kinds, in particular to promote and facilitate trade relations between Germany, other European countries and overseas markets.” It seems to be Sewing’s mantra as well.
--With assistance from Birgit Jennen.
To contact the reporter on this story: Steven Arons in Frankfurt at sarons@bloomberg.net
To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen
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