Deutsche Bank Losing the Benefit of the Doubt

Deutsche Bank's co-chief executives Jürgen Fitschen and Anshu Jain face a reckoning with shareholders. Some investors have lost faith in their ability to lead the bank through scandals and a major restructuring. A shareholder meeting could deliver a fatal blow of no confidence.

Doubts are growing among some major shareholders of Deutsche Bank that the bank's top managers can deliver a promised major restructuring at a time when Germany's largest bank is fighting to recover from a $2.5 billion fine for manipulating interest rates.

The influential U.S. stakeholder advisory firm Institutional Shareholder Services has recommended its members vote against co-chief executives Jürgen Fitschen and Anshu Jain, a sign of no confidence, at Deutsche Bank's annual shareholders meeting on May 21.

German advisory firms have given similar advice.

Ivox, a German advisory firm, has expressed doubt that “management is in a position to adequately lead the company” and recommended its clients vote against not only its top management, but Deutsche Bank's non-executive supervisory board, which approved the restructuring and oversees major policy, as well.

Ivox, a German advisory firm, has expressed doubt that “management is in a position to adequately lead the company” and recommended its clients vote against not only its top management, but Deutsche Bank's non-executive supervisory board, which approved the restructuring and oversees major policy, as well.

The association representing German securities owners, the DSW Deutsche Schutzgemeinschaft für Wertpapierbesitz, has taken the same position.

“Until a couple of weeks ago, it was clear that the executive board would be,” reaffirmed in a vote by shareholders, one of Deutsche Bank's 20 largest shareholders, who declined to be identified, told Handelsblatt. “But now doubts have arisen.”

At most German shareholder meetings, shareholders vote to "discharge'' a company's top managers, usually the chief executive, in a referendum that is usually a formality and rarely contested.

But in the case of Deutsche Bank, the upcoming vote has the potential to deliver a verdict, in effect, of no confidence, which could speed the departure of the co-chief executives, who took over in 2012.

 

The Libor Scandal-Deutsche Bank

 

To be sure, it's unclear how many shareholders will ultimately oppose "discharging'' Mr. Jain and Mr. Fitschen at the upcoming meeting.

Currently, Deutsche Bank's largest single shareholder is the asset manager BlackRock, with 6.2 percent. BlackRock is the world's largest asset manager, with $4.8 trillion under management at the end of the first quarter.

Among Deutsche Bank shareholders, BlackRock is followed by Paramount Services, the holding company of Qatari Sheikh Hamad bin Jassim bin Jaber al-Thani , with 5.8 percent.

If Deutsche Bank's shareholders deliver a vote of no confidence to Mr. Fitschen and Mr. Jain, the supervisory board could then move to recall them for dereliction of duty or incompetence. The supervisory board, however, is essentially the same panel that hired the two top managers and signed off on their restructuring, which raises questions about that board's longevity as well.

The supervisory board is currently chaired by Paul Achleitner, the former chief financial officer of Allianz, Germany's largest insurer, and former head of Goldman Sachs' German office. It is unclear whether the supervisory board also endorsed Deutsche Bank's strategy of dragging out its cooperation in the Libor scandal, which backfired and resulted in the record fine.

 

WTB 2014

 

The current crisis of confidence stems from two major issues.

Mr. Fitschen and Mr. Jain's restructuring strategy, which seeks to save €3.5 billion or $3.9 billion annually by 2020, but will cost  €3.7 billion, has not gone down well with investors.

Under the plan unveiled last month, Deutsche Bank will sell off Postbank retail banking nework and make cuts in investment banking.

But many analysts and shareholders see the measures as being too little too late and thin on details. Mr. Fitschen and Mr. Jain have promised more specifics -- later. Since the restructuring was announced, Deutsche Bank's share price has fallen by 10 percent.

Perhaps more damaging is Mr. Fitschen and Mr. Jain's handling of the Libor trading scandal at Deutsche Bank's London offices, which earned the bank a record $2.5 billion fine from U.S. and U.K. regulators last month who said the bank's executives intentionally manipulated the London Interbank Offered Rates, or Libor, benchmarks upon which all global interest rates are based.

According to regulators, Deutsche Bank was uncooperative in the investigation and sought to draw out the investigation, a strategy that in hindsight earned the German bank not only opprobrium from regulators but the largest fine in the scandal as well.

A report by Institutional Shareholder Services concluded that Deutsche Bank's “executive board ultimately bears responsibility.”

Under the plan unveiled last month, Deutsche Bank will sell off Postbank retail banking nework and make cuts in investment banking. But many analysts and shareholders see the measures as being too little too late and thin on details.

At the center of the Libor scandal is a Deutsche Bank employee identified as “Trader 3” in U.S. Justice Department documents. Based on his job description in the documents and corroboration from financial circles, Trader 3 has been identified as Christian Bittar, who worked in an elite group for Deutsche Bank in London.

During the 2008 financial crisis, Mr. Bittar received the largest bonus in the history of Deutsch Bank. Previously estimated at €80 million, the documents show he actually received 90 million pounds. That's €124 million at current exchange rates.

Mr. Bittar had considerable influence at Deutsche Bank and in the global investment banking branch, according to the U.S. Justice Department. From 2005 to 2008, he used his success to establish a trading ring that ultimately included six banks.

The ring colluded to improve their trading positions by manipulating benchmark interest rates such as Euribor and Libor. But it wasn't just Mr. Bittar who was at fault. The investigators found that other managers at Deutsche Bank who were involved in or knew about the rate manipulations were often promoted.

Regulators were surprised to find that an internal investigation by Deutsche Bank found no suspicious activities at Mr. Bittar's trading desk, although attempts to manipulate Euribor and Libor occurred openly through written communication and verbal requests that a number of key managers at Deutsche Bank were aware of.

 

Deutsche Bank has been fined a record $2.5 billion by U.S. and U.K. regulators after some of its London traders manipulated global interest rate benchmarks to generate illegal profits.

 

Deutsche Bank's current co-chief, Mr. Jain, was the head of the investment banking branch during Mr. Bittar's tenure. Though Mr. Bittar was by far the best-paid investment banker, he had no personal relationship with Mr. Jain, according to a source in financial circles who declined to be named.

Mr. Bittar was suspended in 2011 and the bank froze the rest of his bonus, keeping an estimated €40 million. British regulators have drawn up a record fine of 10 million pounds against Mr. Bittar, according to information obtained by Handelsblatt.

The fine has not yet been imposed.

Deutsche Bank has subsequently expressed deep regret over the scandal, saying that better internal controls have since been implemented. But the bank has failed to really change its corporate culture, as both Mr. Jain and Mr. Fitchen have promised, according to the DSW German shareholders' association.

“In contrast, Deutsche Bank stands worldwide in the crosshairs of regulatory agencies due to misconduct,” the association said.

 

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Under pressure to pay regulators, Deutsche Bank is looking to sell its 50-percent stake in Tank & Rast, a German gas station and restaurant operator, which could generate up to €1.75 billion, people familiar with the situation told Handelsblatt.

Deutsche Bank, through a property fund called Rreef, holds a stake in the autobahn chain of 390 gasoline and food stores along with British private equity firm Terra Firma, which holds the other 50 percent. The sale, which could be closed by this summer, would fetch up to €3.5 billion, or $3.9 billion, for the German bank and British fund, according to the source.

 

Michael Brächer, Michael Maisch and Peter Köhler are Handelsblatt editors who cover banking and finance. Mr. Maisch and Mr. Landgraf are also deputy heads of Handelsblatt's finance section in Frankfurt. Handelsblatt editors Katharina Slodczyk and Robert Landgraf also contributed to this article. To reach the authors: [email protected], [email protected], [email protected], [email protected] and [email protected]