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Deutsche Bank chairman Paul Achleitner knows only too well how it feels to be on the receiving end of a full-throated German shareholder revolt.
As a supervisory board member at Bayer, the 62-year-old witnessed the unprecedented vote of no confidence that investors delivered to the leadership of the aspirin-to-weedkiller group at its annual meeting last month.
The rebuke came a day after Deutsche abandoned merger talks with Commerzbank — an outcome that makes a similar shareholder backlash even more likely against Germany’s biggest bank at its own annual meeting on Thursday.
With analysts expressing frustration at the bank’s poor performance, and its share price hitting a new record low this week, proxy advisers ISS and Glass Lewis are recommending shareholders deliver a similar stinging rebuke to Deutsche.
“We had initially assumed Deutsche would draw some strategic conclusions ahead of the shareholder meeting,” says Stuart Graham, head of Autonomous research, who believes Deutsche’s management “could well lose” the same confidence vote that Bayer’s did.
Deutsche’s bosses are facing calls to take more drastic action, especially as its revenues keep shrinking, its profits remain stuck far below rivals and it is being investigated for alleged money laundering abuses by authorities around the world.
Whatever the result of Thursday’s vote, the gathering in Frankfurt’s Messe festival hall will concentrate the minds of investors on the many challenges facing Mr Achleitner and his chief executive Christian Sewing.
Fixing the investment bank
The biggest strategic hurdle is to turn round its ailing investment bank, a daunting task underpinning the question of whether Deutsche can hold on to a decades-long ambition to compete with Wall Street’s top banks.
Although Mr Sewing, who has led the bank for just over a year, has started overhauling the business, it still ties up two-thirds of the bank’s capital.
Deutsche’s corporate and investment banking division made a return on equity of less than 1 per cent in 2018, compared with 16 per cent cranked out by the equivalent divisions of rivals JPMorgan Chase or UBS.
Several members of the German lender’s supervisory board and four large shareholders have been pressing management to shrink the division. Those calls are set to grow louder as analysts predict the unit will this year suffer its fourth consecutive annual decline in revenues, while its profitability remains razor-thin.
“[Further] investment banking cuts are going to happen, but Christian can’t admit it yet,” says one large investor.
Immediately after the collapse of the talks with Commerzbank, Mr Achleitner told the Financial Times there was no need for a fundamental strategic overhaul.
The potential benefits of closing some of the division’s worst performers are underlined by JPMorgan analyst Kian Abouhossein, who estimates that losses from Deutsche’s US equity trading operation alone are €200m to €300m a year.
Yet analysts at UBS, who this week downgraded Deutsche shares to a “sell” rating, worry about its “muddle through” approach and warn they “don’t expect operating conditions to improve anytime soon”.
Overhauling the top team
The contracts of four of the bank’s nine management board members expire next year and the bank is expected to replace several members of its top team.
Deutsche’s supervisory board is likely to replace Sylvie Matherat, its chief regulatory officer, according to two people familiar with the board.
The former French central bank official has a contract until 2023 but she has been under pressure since September when regulator BaFin ordered Deutsche to do more to prevent money laundering and terrorism financing.
Replacing Ms Matherat “is just a question of when, rather than if”, according to one person close to the supervisory board.
The future of investment banking chief Garth Ritchie is also under scrutiny. He received a new five-year contract and a €3m pay rise last year, but influential shareholders have called for his removal.
In 2018, Mr Ritchie was the worst performer among Deutsche’s top executives, according to the lender’s compensation report, which showed that he only achieved 80 per cent of his individual goals set for the year.
Reversing years of decline
The strategy laid out by Mr Sewing hinges on the bank generating more revenue and profits from key areas such as retail banking, asset management and transaction banking.
In retail banking, Deutsche needs to reap benefits from its decade-old acquisition of domestic rival Postbank. Frank Strauss, Deutsche’s head of private and commercial banking, told the FT last week that the integration of Postbank was ahead of schedule and he was confident of trebling his unit’s return on tangible equity by 2021.
For asset management, much depends on Asoka Wöhrmann, who was parachuted in as new head of Deutsche’s money managing arm DWS last October. He managed to reverse a decline in assets in the first quarter and is pushing a merger with UBS’s asset management arm to create a new European power house.
However, talks with UBS have stalled as both sides quarrel over valuations and who would control a combined entity with about €1.4tn of assets. “The odds of a successful deal are just 50/50,” says a person familiar with the discussions.
In transaction banking — which encompasses cash management, trade finance and payments — Deutsche aims to double pre-tax profits to €2bn by 2022 while boosting revenue by a quarter, partly by improving links to the currency trading operation.
“We want to invest quite a bit,” Stefan Hoops, a protégé of Mr Sewing who has run the business since October, told the FT in March.
Shedding unwanted assets
Although some progress has been made in cleaning up the bank’s balance sheet, it still has derivatives exposure of more than €300bn. Some are long-running positions that tie up a lot of capital but generate no revenue.
About 90 per cent of the long-running derivatives with maturities of more than five years — roughly half of the total exposure — are interest rate products which, according to a person familiar with them, are less risky than currency related ones as they have a predefined runoff profile over time.
Deutsche also sits on €25bn of illiquid and difficult-to-price assets classed as “level 3” by regulators. A person briefed on the matter said there was a high turnover among these assets, with the “large majority” having an average lifespan of two to three years.
While the absolute size of these illiquid assets might look small compared with its €1.3tn of total assets, investors are uneasy because they cannot assess the riskiness of these positions. “They represent 53 per cent of Deutsche’s common equity tier 1,” warns the chief investment officer of a large German asset manager.
To address these concerns, the bank is exploring ways of shedding as much as €50bn in risk-weighted assets, or 14 per cent of its balance sheet, says a person familiar with Deutsche’s internal discussions. However, a bank insider said that figure seemed high and no decision had been made.