With Shares Plunging, Deutsche Bank Sets Out to Prove It Can Be Fixed
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Version 0 of 1. After John Cryan took the helm of Deutsche Bank in July, he set out to quickly clean up the mess left by his predecessors. The bank has taken earnings-crushing charges, slashed costs and pulled out of countries that it has been in for decades. Mr. Cryan, a cerebral British banker, is even getting down into the minutia. He is personally helping to decide which complex derivatives trades to close as he tries to free up scarce financial resources for better investments. But in recent weeks, the markets have wondered whether Deutsche waited too long to mend itself. Shares in the bank, Germany’s largest, have plunged nearly 40 percent so far this year. The market now effectively values Deutsche at a third of its liquidation value, an astonishing discount that suggests investors do not believe that Mr. Cryan will be able to squeeze solid earnings out of the bank’s businesses. Investors in credit markets have even begun to bet that some of Deutsche Bank’s bonds will not be repaid in full. “We took our medicine early,” Gary D. Cohn, president of Goldman Sachs, said on Tuesday in an interview with Bloomberg TV, when asked about Deutsche Bank. “I think some of the European banks have been slow to getting themselves recapitalized and getting their financial balance sheet in the best place it can be.” The disfavor in the markets may pass, especially if central banks around the world signal that they are willing to do more to support economic growth and the global financial system. Mr. Cryan and his new management team may also soon be able to show that they are making progress with their turnaround plan, perhaps by settling some of the many lawsuits that Deutsche Bank faces. Deutsche Bank is also not as fragile as the banks that crashed or required bailouts in 2008 — a message Mr. Cryan was eager to get out this week. “Clients may ask you about how the marketwide volatility is impacting Deutsche Bank,” Mr. Cryan said on Tuesday in a memo to employees. “You can tell them that Deutsche Bank remains absolutely rock-solid, given our strong capital and risk position.” Still, Deutsche Bank is trying to fix itself at what looks like an increasingly inauspicious time. Doubts are swirling over many of Europe’s large banks, which took longer than their United States peers to bolster their balance sheets after the financial crisis. European banks with large trading operations, like Credit Suisse and Société Générale, have also come into investors’ cross hairs this week. The sharp declines in the shares of European banks are an indication that the region is still grappling with the threat that large banks can pose to the wider economy when they run into trouble. Regarded in Germany as a national asset and a symbol of economic might, Deutsche Bank sits at the center of the “too big to fail” debate. Germany’s finance minister, Wolfgang Schäuble, even spoke out in support of the bank, saying on Tuesday, “No, I have no concerns about Deutsche Bank.” When he became co-chief executive, Mr. Cryan seemed well qualified for the tasks ahead. (Mr. Cryan will drop the “co-” from his title in May when the other co-chief, Jürgen Fitschen, is set to retire.) He had, after all, been involved in a far-reaching overhaul at UBS, a Swiss bank that got into deep trouble during the financial crisis. Mr. Cryan even seemed to relish the challenge. “Sometimes I go home in the evening and I say to my wife, ‘I wish some people would actually think I had some talent for running a company and not just cleaning it up,’ ” Mr. Cryan said, at a news conference in Frankfurt last month. “It should be fun running a company like this.” But Mr. Cryan finds himself battling on three fronts. The bank has to simultaneously shore up its balance sheet, produce dependable profits and satisfy the demands of frustrated regulators, particularly those in the United States. Deutsche Bank has less capital, the financial foundation of a bank, than many of its peers, which can mean investors view it more warily when markets tumble. Deutsche Bank’s leverage ratio, a regulatory metric that measures capital as a percentage of assets, was 3.5 percent at the end of 2015, well below the 6.5 percent that JPMorgan Chase reports. Deutsche Bank can raise its capital levels by off-loading subpar loans and trades or selling new shares. But both remedies are hard to pull off when there is bone-shaking turbulence in global markets. “Deutsche is fixable,” said James Chappell, a senior financials analyst at Berenberg in London. “Considering the current state of credit markets, it’s much harder to achieve — and that’s the key question really.” But even with higher capital, Deutsche Bank has to show where its profits are going to come from in the future. Some of the European banks that have slashed the size of their trading operations have been able to fall back on other businesses that have performed relatively well. Credit Suisse and UBS, for instance, have large wealth management divisions that can produce stable profits. Analysts say that Deutsche Bank lacks a large alternative source of profit that could take up much of the slack if Mr. Cryan took an ax to the trading operations, which accounted for nearly a third of the bank’s revenue last year. While Deutsche Bank has 1,800 branches in Germany, the retail network has never been very profitable and lost 675 million euros in the last quarter of 2015. In Germany, private banks have trouble competing profitably with savings banks, which are typically controlled by local governments content with meager earnings. Much of Deutsche Bank’s fate depends on how it fares in the United States, where regulators have long been dissatisfied with the bank’s operations. One United States Deutsche unit, a trust bank, last year failed a regulatory stress test carried out by the Federal Reserve. The failure was expected, and another overseas bank also fell short. An even bigger test looms. In 2018, all of Deutsche Bank’s United States operations, including its big investment bank, are to start undergoing regular Fed stress tests. The bank is now preparing to put its American operations into one holding company that will be subjected to the test. Deutsche Bank has been hiring heavily to get ready for the stress tests, said Renee Calabro, a Deutsche Bank spokeswoman. Then there are Deutsche Bank’s legal costs, which have concerned investors for many months and have served to remind the public of the bank’s missteps. In some litigation, Deutsche Bank is accused of acts that took place several years ago, including selling shoddy mortgages before the financial crisis. But other investigations are focused on more recent activities, including one that looks at stock trades that took place in Moscow and London. Deutsche Bank has settled a handful of lawsuits, like one in the United States last year that accused the bank of violating sanctions, and it has set aside over $6 billion for future legal payouts. In his memo on Tuesday, Mr. Cryan sought to underscore his role in clearing the litigation cloud hovering over Deutsche Bank. “I am personally investing time to resolve successfully and speedily open regulatory and legal cases,” he wrote. “I want to remove the uncertainty among staff and in the market that these cases cause. A small group of senior people, led by me, will focus on this.” |