June 4 1999 was a warm, sunny day in Frankfurt — perfect for the open-air party that Deutsche Bank was throwing in front of its twin-tower headquarters in the heart of Germany's financial capital.
Hundreds of staff gathered in front of a vast video screen beaming footage back and forth from New York. They swigged Miller beers, snacked on hamburgers and watched giant balloons rise into the sky.
The display of Americana was a celebration of Deutsche's US$10 billion ($14.9b) acquisition of Bankers Trust, a Wall Street institution that propelled Germany's biggest lender into the global big league.
Two decades on and Deutsche Bank is about to announce a dramatic untangling of that zealous expansion. After five years of continuous decline in the group's investment banking business — and a concomitant collapse of its share price — chief executive Christian Sewing is expected to ask his supervisory board this weekend to authorise a radical restructuring of the group that in 2007 was briefly the biggest bank in the world but which today is struggling for relevance against its global rivals.
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The root and branch restructuring could see as many as 20,000 jobs lost, the creation of a €50b ($84.4b) "bad bank" — Deutsche's second since the global financial crisis — and cost as much as €5b, potentially driving the bank back into the red this year.
It will be the fifth strategic plan in just seven years, reflecting the difficulty that Deutsche has found in coming to terms with tougher regulations, a string of scandals and the bald truth that without a top five investment bank, which drove its profits for 15 years, it has few other franchises to fall back on.
One top 10 shareholder briefed on the plan appears convinced, describing Sewing's vision as a "bold strategic reorientation". The bank's 90,000 employees, its irate investors and Europe's biggest economy — in which it is anchored — will hope he is right.
The investment banking adventure was not meant to end this way. When Deutsche unveiled the Bankers Trust deal — the brainchild of buccaneering investment banking boss Edson Mitchell — it ushered in an almost decade long boom up to the 2008 financial crisis.
Undeterred by Mitchell's death in a plane crash just a year after Bankers Trust was acquired, his protégé Anshu Jain went on to build one of the world's top fixed-income specialists, riding the wave of ever more complex derivatives structuring that brought Deutsche increasing profits, bulging bonuses and the grudging respect of Wall Street's more established names.
"It was an inspirational place to work," recalls one former executive.
But the rapid expansion of Deutsche's investment banking division overshadowed everything else. The group's low-profit retail and corporate bank in Germany — which must compete in a market dominated by co-operatives and savings banks that do not seek to maximise returns — was starved of investment, as was its asset management arm.
The pace of investment banking growth also outstripped the group's ability to control it via effective compliance and risk management functions. And its rapid hiring of staff, made possible by paying them more than rivals, engendered a mercenary culture.
Though Deutsche fared better than many in the teeth of 2008, the regulatory crackdown that followed has proved fatal to its business model. The decision to force banks to fund their operations with less debt and more equity capital from shareholders has proved particularly disastrous for Deutsche, whose pre-crisis balance sheet was one of the most leveraged in the world.
Over the past decade it has had to raise more than €30b of equity, twice the market value of the bank today. At the same time profits have shrunk amid declining demand for the fixed-income bonds and rate products at which it excelled. The net result: a collapse both in the bank's return on equity and in investors' faith that it can recover.
"Deutsche today is uninvestable for most active fund managers and that won't change fast," says one top shareholder. "It is a 10-year task to reposition this bank."
Four chief executives in just over four years have failed to stop the rot. Jain, who was co-chief executive until mid- 2015, was slow to realise how disruptive regulators' new capital requirements would prove. His successor John Cryan bolstered capital and began some cuts but expanded a lossmaking equities franchise, flip-flopped on strategy and was undermined by senior colleagues.
Deutsche has been lossmaking in three of the past four years, reporting big falls in earnings amid myriad litigation and regulatory compliance failings. It has had to pay US$7.2b in penalties for mis-selling US mortgage securities, and was sanctioned for helping to launder US$10b in dirty money out of Russia.
In April, a government-backed effort to orchestrate a merger with local rival Commerzbank ended in failure. Sewing and his advisers had been working on a "plan B" since mid-December in parallel to the merger talks. The brief was to sketch a plan of how to escape what his own chief financial officer has called a "vicious circle" of declining revenue, stubborn costs, a falling credit rating and rising funding costs.
Shareholders showed their frustration at an angry annual meeting in May. Under fire chairman Paul Achleitner saw off an attempt to oust him, but directors still only garnered the support of three-quarters of shareholders in the annual vote on whether they properly discharged their duties — far short of the 90 per cent-plus approval ratings that are normal at German companies.
Sewing knows that the modest cost-cutting he has engaged in since he began in the job 15 months ago has been far too timid. Even before being appointed chief executive, he was clear that the group's investment bank was excessively dominant — writing a strategy paper which sketched out most of the looming reshuffle. "We lost our balance," he told the Financial Times two years ago. "It was good to go international. It was good to expand in investment banking. But we overdid it."
Emboldened by the accumulating pressure, he appears now to have galvanised his board and regulators for a profound overhaul. He also seems to have the support of a once disparate group of top shareholders — comprising US activists Cerberus and Hudson, two Qatari wealth funds and BlackRock, the world's biggest asset manager. Indeed several other big investors have been campaigning for just such a plan for many months.
"Everyone knows that there is no time left for incremental tweaks," says one senior European policymaker. "This has to be a radical plan."
Directors could debate the detail of Sewing's restructuring plan as early as Sunday. Assuming it is approved, the Deutsche that emerges from the overhaul will look very different from the bank of the past two decades. Large parts of the group's ill-fated US expansion will be rolled back and tens of billions of dollars of complex derivatives will be sold off, pivoting the group towards its more prosaic corporate and asset management businesses.
"It de facto kills the misplaced mantra of [Deutsche as] the 'Goldman Sachs of Europe'," Davide Serra, founder of one major investor, Algebris, recently said.
The process will be painful. Up to a fifth of its total staff could be axed, with its US and UK operations hardest hit.
But the shrinkage appears overdue. Deutsche's investment bank employs 38,300 people, the same number as the whole of Goldman Sachs, even though the Wall Street bank makes 1.5 times the revenue of its German peer, JPMorgan analyst Kian Abouhossein points out. Operating costs in the investment bank swallowed 95 per cent of its revenues last year, compared with 55 per cent at market leader JPMorgan. Between 2012 and 2018 the overall group made a cumulative net loss of €6b.
In its German retail operations, where Deutsche has been shedding 2,000 jobs a year through attrition and voluntary redundancies since late 2017, extreme cuts are difficult, given the country's strict labour laws and the powerful role that unions have on Deutsche Bank's supervisory board. The group has promised the unions that it will avoid forced lay-offs at least until mid-2021.
The investment bank cuts will focus in particular on the equities trading business outside continental Europe — estimated to be losing €600 million a year. Deutsche may close the unit entirely. Executives have held talks with rivals such as BNP Paribas and Citigroup over selling assets or entire units, people familiar with the discussions say, though potential buyers play down the likelihood of deals.
A number of Deutsche's top New York executives are gone already or are expected to leave as a result of the restructuring, adding to the drain of top-level staff that has hit the bank in recent years. Sewing and his team are also looking to shrink or close other international hubs such as Dubai and Johannesburg.
The other main plank of the restructuring will see the bank hive off more than €50b of risk-weighted assets into a new bad bank. Sewing — a former risk officer who joined Deutsche as an apprentice in a branch in the Westphalian town of Bielefeld — wants to free the bank from long-dated derivatives written in the boom years.
Profits from those transactions were booked upfront, generating big bonuses for those who arranged the deals. But they will continue to tie up capital for the 20 or 30 years that they still have to run.
The most high-profile victim of the rejig will be Deutsche's top investment banker Garth Ritchie, an equities trader who has been with the organisation for 23 years. He is all but certain to leave the bank over the weekend, with Sewing taking on his responsibilities.
Chief regulatory officer Sylvie Matherat, who has presided over a string of embarrassing and costly money laundering issues, is also set to go, two people briefed on the matter told the FT.
Some worry that the severity of cuts to the international business could undermine Deutsche's ability to service clients at home. "There is a substantial difference between downsizing and outright closure of Deutsche's non-European equity capacity," says Goldman Sachs analyst Jernej Omahen.
"An outright closure [of the US operation] would raise questions about its capacity to act as a global investment bank to its European corporate client base."
But one former member of the executive board thinks Sewing's overhaul is too little, too late: "Deutsche's problem has always been a lack of decisiveness," he says, adding that he lobbied for swift action during his tenure. "I said 'bite the bullet, take the losses, move on and stop wasting time — free up our minds and balance sheet', but we were ignored."
To counterbalance the swingeing cuts in the investment bank, Deutsche plans to expand its asset management and transaction services businesses, comprising cash management and trade finance. The latter unit is aiming to double profits to €2b by 2022 while in asset management Sewing has declared an ambition to build its DWS brand into "one of the world's top 10". That would mean doubling assets under management to €1.4 trillion.
Merging DWS with a rival asset manager such as the comparable division of Swiss bank UBS would be one way to do this. Talks have been under way for months though they have become bogged down in a dispute over valuation and control.
According to people close to the process, the bank has convinced regulators that its common equity tier one capital ratio — the most important measure of financial strength — should be allowed to dip roughly one percentage point to around 12.7 per cent, freeing up €3.5b. Hiving off €50b of risk-weighted assets via the new bad bank could free another €6b in capital, Citi analysts estimate.
Whether the plan can really fix the deep-seated problems at Deutsche is the biggest question of all. Despite the support expressed by some of the bank's largest investors, other leading shareholders have told the Financial Times they remain concerned the lender lacks sufficiently profitable other businesses.
"The core bank returns would still be low, so questions will remain on the ability to generate organic capital," says Citi analyst Andrew Coombs, pointing out that a new wave of still tougher capital regulations is pending.
"This [restructuring] is the final bullet," a top regulatory official says, adding that there is widespread optimism among supervisors that the plan can succeed.
As it prepares to mark its 150th anniversary in March, the party atmosphere of 1999 seems unlikely to return: the share price is brushing record lows and is more than 80 per cent down on the level of 20 years ago.
But if Sewing's plan can at least restore the stability of the 130 years that preceded the Bankers Trust deal, that may be cause enough for celebration.
Written by: Patrick Jenkins, Stephen Morris and Olaf Storbeck
© Financial Times
