Putting the Deutsche back into Deutsche Bank

Latest developments at Deutsche Bank would appear to offer incontrovertible evidence that the next chapter will be dominated as much if not more than the one that ended with the exit of the former CEO by drastic cost-cutting and a return to its roots.

Taken in the round, a new CEO with a background in risk and audit and former responsibility for the Private and Commercial Bank; a new co-president with a background in operations and human resources; and the departure of the former co-head of the Corporate and Investment bank who had been pushing to invest more in the troubled unit can mean just one thing.

And that’s gravitating away from the cost and headcount-heavy corporate and investment bank in favour of retail and commercial banking. Achieving this will be no trivial matter: Deutsche Bank’s culture for almost a quarter of a century has been that of an aggressive, international Wall Street trading powerhouse defined by domination of global derivatives markets.

Times have changed. More to the point, the difference between that legacy and building a retail and commercial bank for tomorrow could not be starker. As a starting point it will mean a shift towards the domestic German market, which in turn will likely lead to the group morphing and adopting a more domestic German culture.

New CEO Christian Sewing doesn’t have much room for manoeuvre: cuts to CIB business lines and headcount are really the only viable path to reducing the cost base and increasing returns. “The new CEO’s options are very limited. It’s very probable that the group is going to be much more focused on commercial and retail banking in Germany. Expanding this and making it more efficient will be a priority. But given the ultra-competitive environment, the only way to achieve even that is to cut costs further,” said Sam Theodore, team leader for bank ratings at Scope.

Deutsche Bank’s 2017 cost/income ratio of 93.4% is a dramatic upside outlier relative to other German bank, and leading French banking groups for that matter, whose C/I ratios are clustered around the high 60s. Deutsche Bank’s CIB headcount of 41,349 at the end of 2017 accounted for 42% of group employees but perhaps more critically, the division generated close to 54% of group revenues. That’s what Sewing has at risk.

Taking just one comparison, 2017 headcount at HSBC’s Global Banking and Markets division was higher than Deutsche Bank’s CIB, at 45,725. But HSBC’s total equates to just 20% of group headcount and 29% of group net revenues. What this exemplifies is Deutsche Bank’s lack of business diversification.

“The main story for Deutsche Bank for some years to come is going to be how far and how fast they can cut costs. For the investment bank, drastic cost cuts are unavoidable. The key questions will be how much meat they are prepared to cut, what’s left at the end of the process, and what happens to the imperative to drive revenue growth while the bank is immersed in cost-cutting,” said Theodore.

To get the group in balance, the supervisory board has created a defensive executive formation on the management board that above all will seek to quell stakeholder criticism – including from key shareholders – that the right-sizing being conducted by John Cryan was going too slowly. In truth, Cryan became CEO at a very unpleasant moment in the history of Deutsche Bank, at a time when the cycle moved strongly against the bank’s business model and the tectonic shifts in banking were moving more quickly than the capacity of the bank to adapt.

The forensic analysis of the investment bank already in play and accelerated by new CEO Christian Sewing, and the dark undertones of his inaugural letter to colleagues will likely have left employees anxious, in particular staff in the CIB. A non-negotiable 2018 cost ceiling of EUR 23bn; eliminating bureaucracy and duplication; zero tolerance for missed cost and revenue targets; adapting the investment bank’s revenue, cost and capital structure; and pulling back from areas not sufficiently profitable leaves little room for interpretation.

“Revenue generation won’t be off the agenda; it’s more a question of what the most immediate goals are going to be. Deutsche Bank needs to come up a credible revenue proposition and business strategy, and a push to re-establish itself in the market on the terms it has set for itself. At the same time, it needs to create incentives to retain its intellectual capital and human talent. If the strategy moves against the investment bank, the first to leave will be the top talent,” Theodore said.

At the moment, Deutsche Bank says it aspires to be the leading client-centric global universal bank. The next descriptor is being written now. Being a leading corporate and investment bank demands a strong footprint in advisory, underwriting, trading, lending, transaction banking, trade finance, securities services and ancillary services. That takes not just a strong brand but a cadre of top talent and playmakers.

“It’s going to be much tougher for Deutsche Bank to retain and recruit key bankers in Europe given the likely direction of travel under the new CEO at a time when competition for that talent from US, UK, French and Swiss banks is very keen,” said Theodore.

Latest developments at Deutsche Bank would appear to offer incontrovertible evidence that the next chapter will be dominated as much if not more than the one that ended with the exit of the former CEO by drastic cost-cutting and a return to its roots.

Taken in the round, a new CEO with a background in risk and audit and former responsibility for the Private and Commercial Bank; a new co-president with a background in operations and human resources; and the departure of the former co-head of the Corporate and Investment bank who had been pushing to invest more in the troubled unit can mean just one thing.

And that’s gravitating away from the cost and headcount-heavy corporate and investment bank in favour of retail and commercial banking. Achieving this will be no trivial matter: Deutsche Bank’s culture for almost a quarter of a century has been that of an aggressive, international Wall Street trading powerhouse defined by domination of global derivatives markets.

Times have changed. More to the point, the difference between that legacy and building a retail and commercial bank for tomorrow could not be starker. As a starting point it will mean a shift towards the domestic German market, which in turn will likely lead to the group morphing and adopting a more domestic German culture.

New CEO Christian Sewing doesn’t have much room for manoeuvre: cuts to CIB business lines and headcount are really the only viable path to reducing the cost base and increasing returns. “The new CEO’s options are very limited. It’s very probable that the group is going to be much more focused on commercial and retail banking in Germany. Expanding this and making it more efficient will be a priority. But given the ultra-competitive environment, the only way to achieve even that is to cut costs further,” said Sam Theodore, team leader for bank ratings at Scope.

Deutsche Bank’s 2017 cost/income ratio of 93.4% is a dramatic upside outlier relative to other German bank, and leading French banking groups for that matter, whose C/I ratios are clustered around the high 60s. Deutsche Bank’s CIB headcount of 41,349 at the end of 2017 accounted for 42% of group employees but perhaps more critically, the division generated close to 54% of group revenues. That’s what Sewing has at risk.

Taking just one comparison, 2017 headcount at HSBC’s Global Banking and Markets division was higher than Deutsche Bank’s CIB, at 45,725. But HSBC’s total equates to just 20% of group headcount and 29% of group net revenues. What this exemplifies is Deutsche Bank’s lack of business diversification.

“The main story for Deutsche Bank for some years to come is going to be how far and how fast they can cut costs. For the investment bank, drastic cost cuts are unavoidable. The key questions will be how much meat they are prepared to cut, what’s left at the end of the process, and what happens to the imperative to drive revenue growth while the bank is immersed in cost-cutting,” said Theodore.

To get the group in balance, the supervisory board has created a defensive executive formation on the management board that above all will seek to quell stakeholder criticism – including from key shareholders – that the right-sizing being conducted by John Cryan was going too slowly. In truth, Cryan became CEO at a very unpleasant moment in the history of Deutsche Bank, at a time when the cycle moved strongly against the bank’s business model and the tectonic shifts in banking were moving more quickly than the capacity of the bank to adapt.

The forensic analysis of the investment bank already in play and accelerated by new CEO Christian Sewing, and the dark undertones of his inaugural letter to colleagues will likely have left employees anxious, in particular staff in the CIB. A non-negotiable 2018 cost ceiling of EUR 23bn; eliminating bureaucracy and duplication; zero tolerance for missed cost and revenue targets; adapting the investment bank’s revenue, cost and capital structure; and pulling back from areas not sufficiently profitable leaves little room for interpretation.

“Revenue generation won’t be off the agenda; it’s more a question of what the most immediate goals are going to be. Deutsche Bank needs to come up a credible revenue proposition and business strategy, and a push to re-establish itself in the market on the terms it has set for itself. At the same time, it needs to create incentives to retain its intellectual capital and human talent. If the strategy moves against the investment bank, the first to leave will be the top talent,” Theodore said.

At the moment, Deutsche Bank says it aspires to be the leading client-centric global universal bank. The next descriptor is being written now. Being a leading corporate and investment bank demands a strong footprint in advisory, underwriting, trading, lending, transaction banking, trade finance, securities services and ancillary services. That takes not just a strong brand but a cadre of top talent and playmakers.

“It’s going to be much tougher for Deutsche Bank to retain and recruit key bankers in Europe given the likely direction of travel under the new CEO at a time when competition for that talent from US, UK, French and Swiss banks is very keen,” said Theodore.