Deutsche Bank continues to face an uphill battle as it seeks to re-position its business in the post global financial crisis operating environment. Oh, what a challenge this continues to be. But turning around a tanker takes time.
As US banks continue to bask in the privileged position of sorting out issues early after the crisis and according to the Europeans buoyed by other unique factors, many European banks are finding the operating environment difficult combined with managing through a maze of tough regulatory challenges and conduct issues while addressing issues of the past. JP Morgan & Co. shares are up some 40% over the past year. Yet European bank shares are languishing - Deutsche's shares are up maybe one or two Euros over the same period of time (and trading at a 10pct discount to the Eur 8 billion capital raising this spring) while Barclays has advanced only by a modest level as well.
The list of issues feels at times to be growing. June 2016, the IMF branded the German firm to be the largest net contributor to systemic risk (FT, June 30 2016), supporting an intense regime of supervision, monitoring of cross-boarder exposures, and rapid completion of a resolution regime. Coming back from summer holidays in 2016, the New Yorker magazine reported on a series of back-to-back or mirror transactions executed by DB Moscow for a client for several years. By January 31st 2017, it was reported in the Guardian and elsewhere that DB was fined £500 million by US and UK regulators for the approximately $10 billion of potential money laundering offences from these transactions.
Meanwhile, Bloomberg announced yesterday that shareholders of the Postbank acquisition may have been short-changed by DB which may lead to compensation to these minority shareholders. Not pretty a pretty sight. The most recent cut came from Autonomous Research LLP who labelled the bank beyond repair and is quoted: When we consider the basics of what makes a bank a winner — trust (or brand), balance-sheet muscle, technology and its people — Deutsche looks to be in very bad shape,” Graham said. In such situations it is inevitable that some investors start to question whether the bank has the right leadership. (https://dealbreaker.com/2017/09/analyst-downgrades-deutsche-bank-to-basically-fucked/)
However, recent headlines entitled John Cryan given six months to turn around Deutsche Bank (The Sunday Times, October 1st 2017) which unearths real investor dis-satisfaction seems out of place. Corporate governance ensures that the supervisory board also shares some of the responsibility for turning things around (see A friend in need by C. Thompson, October 15th, 2017 at Breakingviews for more on this dynamic and the lack of real alternatives).
Cryan took the job some two years ago and the issues, hardly well chronicled here, spans the domains of legacy risk management issues, de-risking, conduct, governance, IT and culture, will take time to address. This is a large bank with more than one interconnected and complex major issue to face. By all means, change management if it is nearly certain to improve the prospects of the firm in a measurable means. But changing the firm's CEO or supervisory board as they work out legacy issues in a complex firm, notwithstanding further setbacks, can actually lead to a further delay towards full recovery.
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