Some of the changes carried out by Deutsche Bank chief Christian Sewing (pictured), and his predecessor have been painful but necessary. Photo / Getty Images
Some of the changes carried out by Deutsche Bank chief Christian Sewing (pictured), and his predecessor have been painful but necessary. Photo / Getty Images
COMMENT:
Deutsche Bank is trapped in purgatory. Every consecutive quarterly drop in revenue, new money laundering investigation, subsequent fall in share price, promise of "tough cutbacks", all seemingly blend into one narrative of an unyielding loss of control that has dragged on for years.
Even the bank's leadership under chiefexecutive Christian Sewing, in charge since April 2018, has borne little effective strategic change. Worse, he is now repeating his own mistakes.
The bank's returns are a far cry from the 4 per cent return on tangible equity promised to shareholders this year, after just 0.5 per cent in 2018. Not a single one of the 18 main analysts covering the lender believes this target is realistic, with the average ROTE forecast for 2019 standing at just 1 per cent.
Sewing's response: an ominous yet vague commitment to pare operations. He neither disclosed which units will be hit, nor when.
Between the lines, he suggested that the lossmaking US equities and rates trading operations could bear the brunt of the restructuring.
In announcing the cuts in advance, Sewing is repeating an error made during the 2018 round of lay-offs. On April 9 that year, a day after Sewing was appointed chief executive, he warned employees in a memo that "we'll have to take tough decisions and execute them" but stopped short of any detail.
Deutsche Bank's returns are a far cry from the 4 per cent return on tangible equity promised to shareholders this year. Photo / Getty Images
More than two weeks later, Deutsche announced a "first outline" of the restructuring plans but it was not until late May that the full scale of the cuts was disclosed and implemented.
The six weeks between the announcement and execution proved to be corrosive.
Employees of potentially affected departments stopped focusing on their work and started to scout for new jobs instead while clients turned to rivals, denting revenues immediately.
Sales and trading revenue in the second quarter dropped 14 per cent year-on-year, and the trading unit's pre-tax profit plunged by almost a quarter.
Some of the changes carried out by Sewing and his predecessor have been painful but necessary. Gone are the times when reckless Deutsche Bank traders — driven by lavish bonuses and a rotten culture — could exploit a fragmented IT system and feeble compliance to their own personal gains.
The resulting swath of misconduct investigations around the world was toxic for Deutsche's reputation, while billions in fines and settlement payments dented its financial position.
But now, just over a year into his tenure, Sewing is again ignoring lesson 101 of investment bank restructuring ("don't talk about it, do it!") and is pushing the bank once more into an unfortunate limbo.
With some progress made and plenty to gain from leaving the old ways behind, why hesitate with the latest round of cuts? One reason is internal resistance.
In late April, chairman Paul Achleitner told the Financial Times that he did not see the need for a radical overhaul of the franchise, which has been lossmaking in the two most recent quarters and is poised for a fourth year of falling revenues.
Deutsche Bank chairman Paul Achleitner. Photo / Getty Images
Some senior figures at the bank suggest the lender's top investment banker Garth Ritchie, who is said to fight deep cuts tooth and nail internally, could resign if he was forced to implement the measures.
The second reason is internal doubt over how much restructuring the lender can afford financially. Closing operations and eliminating unwanted assets is likely to trigger short-term losses that would hit Deutsche's equity.
The quandary is that the lender's profitability is low, so Deutsche cannot create new equity by retaining earnings.
The share price, which is close to historic lows, means that a capital increase is no realistic option either, as it would be highly dilutive for existing investors and probably still too small to move the needle.
Yet the days when Deutsche could afford to waste time have long gone. Either senior management has still not fully got that message, or Deutsche these days is so weak that the bank may be unable to salvage itself.
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