DEUTSCHE BANK Getting with the Program

Chinese conglomerate HNA's unexpected acquisition of a stake in Deutsche Bank is good news for management. But the bank’s recovery is still very much a work in progress and managers are wondering how the new Chinese shareholders will impact that.
HNA's gleaming headquarters in Haikou City will have some power over Germany's largest bank, if they choose to use it.

Chen Feng is on a shopping spree. Few other Chinese business moguls pursue takeovers and investments as energetically as the founding chairman of the conglomerate HNA. His empire includes China’s fourth-largest airline, Hainan, as well as stakes in 30 other companies. Since last week, Deutsche Bank has been part of the family, too.

The Chinese company bought shares worth €755 million, around $800 million, a 3.04-percent stake in Germany's largest bank. HNA arranged the investment through Austrian asset management firm C-Quadrat, in which HNA has a 10-percent holding.

It's good news for Deutsche Bank Chief Executive John Cryan, but then, it also adds another powerful shareholder voice to the ranks of a bank that remains mired in a difficult restructuring. While the bank's major shareholders still back management, some investors are growing impatient. HNA is now Deutsche's third-largest shareholder, so just what kind of investor will they be?

It wasn't the smoothest of starts. The bank’s management was only informed about the move shortly before it took place, according to financial industry sources. There were no talks with HNA, and management does not know how the new investors intend to use their influence, for example whether they will be seeking a seat on the bank's non-executive supervisory board that monitors decisions and hires and fires executives.

So far the Chinese are presenting themselves as friendly shareholders: “We have the fullest confidence in Deutsche Bank's management and will keep a close watch on its future steps and lend support as a shareholder where appropriate,” they said in a statement through C-Quadrat.

The bank's strategic choices are very complex. It only has one shot at it, and it has to get it right. a Deutsche Bank shareholder

HNA joins two other major shareholders in the bank. Six percent is directly held by members of the Qatari ruling family, who control a further 4 percent through derivatives. The American asset management firm Blackrock has a further 6 percent. Like HNA, these large shareholders have publicly expressed support for the bank’s top management.

Mr. Chen’s move forms part of a highly ambitious strategy. According to internal documents seen by Handelsblatt, HNA has ambitions to become one of the world’s top 10 largest companies within the next five years. The company has already achieved its first aim: Breaking into the Forbes list of the world’s top 500 companies.

HNA’s wealth originally comes from the airline Mr. Chen founded in 1993, after studying at a Lufthansa training school in West Germany. His strategy focuses on growth at all costs, with one acquisition often used to fund the debt needed for the next.

The company’s rise has been rapid: It now employs some 300,000 staff in China, Europe, and the United States. But new Chinese restrictions on overseas investment could impact its plans for global reach. Since last year, all foreign investments must be officially approved. This has led to a 35.7 percent drop in overseas direct investment.

HNA's founding chairman, Chen Feng, has big global ambitions.

Deutsche Bank's own global ambitions have been sharply curtailed in the past few years since the 2008 financial crisis. The bank, which rose to become Europe's largest investment bank and a major player on Wall Street in the early 2000s, has been hit by more than $10 billion in legal settlements and fines and is currently undertaking a wide-ranging strategic review of all product groups, clients, and regions. The bank announced a round of major job cuts and plans to close unprofitable businesses in late 2015, a few months after Mr. Cryan took charge, but more changes could be coming.

Mr. Cryan has indicated that the new changes this year will be more of a fine-tuning than a radical shift. But he has two key decisions to make: whether to sell or fully integrate its retail banking subsidiary Postbank – a decision that has haunted the bank for much of the past two years – and whether to float part of the bank’s successful asset-management arm. Both sales are designed to raise much-needed capital.

With Postbank, financial sources suggest Mr. Cryan is heavily leaning toward reintegration, which would scupper plans first announced by his predecessors, but a final decision has yet to be made. Kian Abouhossein, an analyst at JP Morgan, said reintegration is a better solution. The bank has lost value since it was bought by Deutsche in 2010 and a sale was unlikely to raise enough capital anyways.

Instead, Deutsche is now thought to prefer floating 25 percent of Deutsche Asset Management, Handelsblatt has reported, which Mr. Abouhossein estimates would bring in around €6.3 billion. Postbank by contrast may sell for only €4 billion.

Banking regulation is one of the many uncertainties clouding the decisions. Before it can make a move, Mr. Cryan and his colleagues need to know what extra capital requirements will be imposed by the upcoming Basel IV package of global financial regulations. But these have been delayed over divisions that remain between American and European banking regulators, with no final compromise in sight.

Financial industry sources have suggested Deutsche wants to make a decision in March, but postponement to April cannot be ruled out. “It is a very complex matter. The bank only has one shot at it, and it has to get it right,” said one large shareholder.

20 p31 Deutsche Bank-01

The strategy must be complete at the latest by the company’s AGM on May 18. At that point, it will be clear if the bank will need to increase its capital again. Shareholders have been concerned for months that a fresh capital raise may be on the cards. Analyst James Chappell, from Berenberg Bank, said he was certain it will take place, saying financial markets expect it to be between €5 billion and €8 billion. Mr. Chappell said his personal opinion was that Deutsche would need €10 billion to steady the ship.

Deutsche Bank’s hard core capital ratio climbed to 11.1 percent at the end of 2016. Mr. Cryan has promised shareholders it will reach 12.5 percent by the end of 2018. Mr. Abouhossein, from JP Morgan, thinks that 13.75 percent might ultimately be needed to satisfy regulators. But figure does not seem to have scared off the bank’s new Chinese shareholders, whose spokesperson said they would not rule out increasing their stake, though not beyond 10 percent.

Despite support for the bank’s leadership, large investors remain concerned about Deutsche’s future. Alongside strategy and capital, doubt remains about the sustainability of the bank’s business model, especially since the crisis of last autumn seems to have cost more market share than initially expected.

In addition, the cancellation of bonuses has caused discontent among bank staff. After a second year of billion euro losses, Mr. Cryan wants to cut bonus payments in half. But a small group of highly valuable employees—around 5 percent of the workforce—will receive packages meant to compensate for bonus cuts, and also intended to keep headhunters at bay. “These bonuses made clear who the bank thinks is indispensable and who isn’t, and that has caused a lot of disquiet,” said one executive. Loss of key staff is thought to be a particular problem in the bank’s U.S. business.

The HNA chairman Chen Feng no doubt hopes that the turbulence will do no lasting damage to the bank. In the last couple of months, the bank has made progress in settling long-standing legal problems. During this time, the stock price has almost doubled, rising to a level of €18 from a low point below €10. The Chinese company is counting on further profits.

“HNA sees Deutsche Bank as an attractive investment in the financial sector and wants to support the bank and the management, so that its outstanding DNA and strong brand will be reflected in profits and share price,” the new investor said in its statement.

 

Michael Maisch is the deputy chief of Handelsblatt's finance desk, based in Frankfurt, Germany's financial capital. Also based in Frankfurt, Daniel Schäfer is head of Handelsblatt's finance pages. Stephan Scheuer is Handelsblatt's China correspondent based in Beijing. To contact the authors: [email protected], [email protected] and [email protected]