When Stephen Feinberg, CEO of the US buyout firm Cerberus Capital Management, jetted into Frankfurt just before Christmas, he delivered a critical report card to John Cryan, the British financier struggling to turn around Deutsche Bank.
Mr. Feinberg, who became Deutsche Bank’s fourth largest shareholder in November by buying a 3 percent stake, supported Mr. Cryan’s efforts at reforming the bank, according to Deutsche officials. But he also gave management a failing grade on those efforts. Cerberus believes that Deutsche Bank is still bloated with inefficiencies and management has bungled the attempts to cut expenses in a meaningful way.
“Costs continue to be a high priority,” Christian Sewing, Deutsche Bank’s president and the co-head of the private and commercial banking arms, said in an interview with Handelsblatt. “That’s where we have to stay on the ball all the time.”
The bank's failure to reduce costs in the fourth quarter challenges the forecast for this year. Kian Abouhossein, analyst at JPMorgan
Mr. Feinberg’s warning proved prophetic when the bank announced last week that it would record a “small full-year after-tax loss” in 2017. The main cause was US President Donald Trump’s tax reform, which brought a charge of €1.5 billion ($1.8 billion) in the valuation of deferred tax assets in the fourth quarter, but it followed losses in 2016 and 2015 when there were no tax issues.
While the tax issue pushed the bank into the red, analysts said they were concerned that Deutsche Bank’s day-to-day performance was steadily weakening and there was no progress in the fourth quarter on cutting costs. The failure to reduce expenses is weakening Mr. Cryan at a critical moment in the bank’s turnaround.
Kian Abouhossein, banking analyst at JPMorgan in London, said Deutsche Bank’s profit warning is a disappointment “that challenges the cost forecast for this year.” Stewart Graham, an analyst with Autonomous Research, said there were fears that the bank only achieved 60 percent of its promised cost reductions in 2017 and the failure to achieve more undercut the credibility of management.
The bank responded to the criticism by telling top managers that they need more discipline. It embarked on a reorganization plan that will cut 9,000 jobs and reduce costs by €4 billion within five years. But that may not be fast enough for investors.
One reason is that Deutsche Bank seriously lags behind its international competition when it comes to overhead. The German bank spends 83 cents to earn one euro, while British rival Barclays spends 63 cents, American giant JPMorgan spends 57 cents and Spain’s Santander Bank only 47 cents.
Markus Schenk, who is co-president with Mr. Sewing and head of the corporate and investment bank, plead for investor patience, a commodity that is clearly in short supply after three years of consecutive losses.
“We have always said that the transformation of the bank will take several years,” Mr. Schenk said. “We are right in the middle of our efforts. We want to demonstrate that we can regain market share after a period of stabilization.”
But costs aren’t the only worry facing management. In its profit warning, Deutsche Bank said revenues from trading at Mr. Schenk’s investment bank have fallen off a cliff. Fixed income, equity sales and financing revenues in the fourth quarter are down by 22 percent, compared with the previous year, the bank said.
While other banks have also experienced declines in trading income, none approaches Deutsche Bank’s poor performance. “Contrary to our expectations, the weak business performance of previous quarters has continued,” said Markus Riesselmann, an analyst at Independent Research. “In 2018 in our assessment is that there has to be progress, particularly on the revenue side, so as not to trigger a strategy debate again.”
One particularly thorny subject is the issue of year-end bonuses, which had been hinted to rise after a severe cut for 22,000 top earners last year, when the bonus pool shrank to €546 million from €1.4 billion in 2015.
According to bank sources, Mr. Schenk and Garth Ritchie, his co-head of the corporate and investment bank, have expressed concern that there may be an exodus of traders if the bonuses don’t rise.
While sources say that a compromise on bonuses totaling about €1 billion had been agreed, that may cause a firestorm when released to the public so soon after another embarrassing loss.
Handelsblatt correspondents Michael Maisch, Yasmin Osman, and Daniel Schäfer, reported this story. It was adapted into English by Charles Wallace, an editor for Handelsblatt Global in New York. To contact the authors: [email protected], [email protected], and [email protected].