Deutsche Bank´s future
January 26, 2016
On Thursday Deutsche Bank CEO John Cryan will have some more damage control to do. Last week Germany 's biggest bank broke the bad news - a 6.7-billion-euro ($7.3-billion) loss for last year, triggering a domino effect: The bank's share price shed 10 percent that day alone.
John Cryan has headed up the bank since last summer. On Thursday he will face the press once again to try and explain the year's deeply indebted balance sheet. And he will have to come up with answers to these pressing questions.
Where next?
"Deutsche Bank has a strategy problem," say Thomas Hartmann-Wendels, a banking expert at the University of Cologne. Not too long ago, the bank appeared strong and confident - but now no one seems to know which direction it is taking in the long-term. Asset management - once one of the bank's core businesses - is suffering from the turmoil of the equity and commodity markets.
The financing of transactions at the bank is also broken - by almost 20 percent according to media reports. "The bank appears exclusively on the defensive. Its focus areas for the future have not been clearly communicated," says Hartmann-Wendels, director of the Institute of Banking and Banking Law.
Enough in the bank?
The legal legacy of Deutsche Bank and its employees weighs heavily on the bank's once powerful image around the world. John Cryan has already set aside 5.2 billion euros for litigation alone. Whether for Libor manipulation, influencing commodity prices, or crooked mortgage transactions - the key question is whether those funds will be enough money to pay all the fines to come.
"I cannot say whether it will be enough. I can imagine though that Cryan estimates the figure to be even higher, but he was not in charge of the balance sheet provisions at the time," says Hartmann-Wendels.
But it could turn out differently. In the US, authorities are currently investigating the suspected breach of political sanctions. The total amount of suspicious transactions there alone could total 6 billion dollars.
New money needed?
It would be better for Cryan to answer this question with a "no" than a "yes," which would likely scare shareholders and customers away. And although recapitalization is not unlikely, requirements set in the wake of the financial crisis, require Deutsche Bank to increase its reserves slowly. After regular losses, high reserves for litigation and expensive restructuring of the group, there is certainly no money left in the current budget.
That raises the issue of new shares. Currently the share price is at rock bottom: from 103 euros per share down to 16 euros. "Raising capital on the market is expensive and waters down the share price for existing share holders," says banking expert Hartmann-Wendels. Many an industry expert is already warning of the threat of a hostile takeover.
Keeping up with the competition?
Such warnings come as no surprise. After all, Deutsche Bank had already long vacated its spot as one of the top banks in the world. While the bank ranked among the top 10 for many years, it now dwindles down at number 53 according to Bloomberg. Meanwhile, The Bank of America is sipping the champagne, after bagging the decade's best result with a $16-billion profit. Deutsche Bank, on the other hand, is simply too expensive. According to the Germany business newspaper "Handelsblatt," the bank had to spend over 84 cents just to earn back 1 euro in the first half of 2015. Cyran aims to bring that ratio to under 70 cents in 2018.
How is the restructuring going?
In a bid to be more efficient, Deutsche Bank is withdrawing from 10 foreign markets. Around 9,000 employees will lose their jobs - nearly half of them in Germany. By the end of 2017, about 200 of 700 branches will be closed. The Postbank will also be sold, doing away with the bank's income from private clients.
"The fact that the restructuring of a massive operation like Deutsche Bank is taking a long time is normal, " says Hartmann-Wendels from the University of Cologne. It is time though, for Cryan to finally put his vision forward for Deutsche Bank in the future.
A ray of hope
It is already foreseeable that the bank's 2015 bonuses will have to be radically slashed. Deutsche Bank is also counting on mass layoffs in its well-paid investment banking division. "It is good to take some distance from utopian credit targets, and Cryan is the right person to do that,” says Hartmann-Wendels.
A modest appearance will only help the bank return to its former powerful position, says the banking expert: "It will take a while, but Germany is one of the world's strongest economies. As such, Deutsche Bank has a certain home advantage it can play on."