Deutsche Bank Restructuring's First Victim

The departure of Rainer Neske, the head of retail banking at Germany's largest bank, could be a harbinger of bigger changes to come as top managers prepare to sell a controversial corporate redesign to skeptical shareholders at a meeting on Thursday.
deutsche bank Rainer Neske, head of retail banking Source Reuters

More management turmoil is the last thing Deutsche Bank needs right now, but that’s what it’s about to get.

Rainer Neske, the powerful head of its retail banking division, wants to resign from the management board following a heated dispute with the two co-chief executives, Anshu Jain and Jürgen Fitschen, about branch closures and layoffs, financial sources told Handelsblatt.

Mr. Neske, in charge of Deutsche’s biggest unit with 38,000 employees and 2,700 branches, is believed to oppose the bank's recently announced strategic reorganization that will sell the Postbank retail banking network and close up to 200 Deutsche Bank branches.

The bank’s supervisory board, which has signed off on the restructuring, will discuss Mr. Neske’s departure at a meeting on Wednesday, the sources said. Deutsche Bank declined to comment on Monday for this article.

Mr. Neske's departure comes as no surprise to insiders.

During Deutsche’s internal talks about its strategic overhaul in recent months, Mr. Neske tried and failed to push through bigger cuts in the investment banking side of the business that Mr. Jain ran before he became co-chief executive in 2012.

In the end, Deutsche Bank last month announced only modest cuts to its trading business but moved ahead with the sale of Postbank, which it bought just six years ago. Postbank is a retail banking network located in the nation's post offices.

Mr. Neske and Deutsche's retail banking business are the big losers in the restructuring.

Mr. Neske had been dissatisfied for years with what he saw as Deutsche’s half-hearted initial investigation into its business practices especially in London and New York.

The changes being planned will reduce the number of employees in Mr. Neske’s division by 15,000 and cut the volume of deposits by €50 billion, or $56.5 billion. His influence within the management structure of Germany’s biggest bank would be curbed by equal measure.

It was Mr. Neske who led the purchase and integration of Postbank.

He wanted Deutsche Bank to become less dependent on high-risk investment banking and more focused on its home market, Germany, earning stable returns with money from domestic retail clients and companies.

He embodied, in a sense, the financial alter ego of Mr. Jain, the high-rolling London investment banker who is trained to pursue high returns and global dealmaking.

But there was another bone of contention between the two men.

Quelle: dpa
The Deutsche Bank co-chief executives, Jürgen Fitschen and Anshu Jain, are fighting to sell a restructuring to skeptical investors, and perhaps fighting for their own positions.
(Source: dpa)

 

Mr. Neske had been dissatisfied for years with what he saw as Deutsche’s half-hearted initial investigation into its business practices especially in London and New York. In the Libor scandal, which involved fixing benchmark interest rates by staff at several top banks including Deutsche, he was convinced that there should have been dismissals at higher levels in the food chain.

Ultimately, Deutsche Bank paid big for its role in the Libor scandal. U.S. and U.K. regulators last month slapped the bank with a record $2.5 billion fine for its involvement, the most assessed against any bank. As if that weren't enough, the regulators also publicly criticized Deutsche Bank for being uncooperative with investigators, an aggravating factor in the case.

The public accusation of being uncooperative seemed to clash with official statements by Mr. Jain and Mr. Fitschen, who have repeatedly asked shareholders for more time as the duo work to introduce what they described as a "cultural change'' within the bank to disabuse employees of a bottom-line oriented thinking that tolerates ethical and legal lapses in the pursuit of rising profits.

For Mr. Neske, the culture change at Deutsche solemnly promised by Mr. Jain and Mr. Fitschen in 2012 hasn't gone far enough.

His departure is likely to further unsettle investors gathering for the bank’s annual general meeting on Thursday in Frankfurt. It was already shaping up to be turbulent with investors becoming increasingly critical of the bank’s weak earnings and falling share price.

 

Voting Results at Deutsche Bank-01

 

“Many shareholders believe that we’ve given the duo at the top enough time,” said a representative of one of the top 10 shareholders in Deutsche Bank, who declined to be identified for this story.

Mr. Jain and Mr. Fitschen had promised a lot since they took over in 2012 and they had “delivered little — too little,” the person added.

Their pledges in 2012 included a return on equity of 12 percent by the end of 2015. In the first quarter of this year, the return was just 3.9 percent. And while the share price has risen by 12 percent since they took over, the DAX index of 30 German blue chips has advanced by some 90 percent, making Deutsche one of the worst performers in the benchmark index.

In response to these setbacks, the bank's supervisory board chairman, Paul Achleitner, ordered Deutsche Bank to revamp its strategy. But many analysts and fund managers criticised the decisions announced last month as too timid, saying the cuts didn’t go far enough and complaining that cost-cutting plans were too vague. The bank has said it will provide details at the end of July.

Corporate sources told Handelsblatt that many investors have been contacting the bank’s management and voicing furious criticism of the restructuring plans.

The long list of scandals and resulting legal costs are a further source of frustration.

Its involvement in the Libor scandal brought Deutsche Bank a record fine, but the German bank is also involved in a string of other lawsuits and legal actions that could prove costly. The bank has set aside €3 billion to cover its legal costs.

 

Overhauling Deutsche Bank-01_redo



 

 

The board's strategy in the Libor investigation, which resulted in the aggravated fine, appeared to have backfired.

“The management board bears final responsibility for that,” Institutional Shareholder Services (ISS), a U.S. advisory firm, said in a report, advising investors to vote against the exoneration of the management board at Thursday’s annual general meeting.

“Most American and British funds will follow the recommendations of the ISS to the letter,” said a large shareholder, who declined to be identified.

Klaus Nieding, a spokesman for Germany's DSW, an association representing small shareholders, said: “The increase in the fine due to alleged delaying tactics is a slap in the face to those who pronounced the change in culture and shows that this change either hasn’t started properly yet or isn’t being sufficiently recognised abroad by the relevant authorities.”

DSW also plans to vote against not just the bank's top managers but its supervisory board as well on Thursday during a vote - usually a formality - to procedurally accept the panels' work during the preceding year.

A further pitfall for the bank could be the ongoing trial of Mr. Fitschen, who faces prosecutors’ accusations that he gave misleading evidence in a civil lawsuit that followed the 2002 collapse of the Kirch media empire, at the time one of Deutsche's clients.

Heirs of the company's late founder, Leo Kirch, accused Deutsche Bank at the time of making public statements that brought about the bankruptcy of the Bavarian media empire. The bank's managers, now mostly retired, have denied the allegation but in 2014, the bank agreed to pay €925 million to settle the civil suit brought by the Kirch heirs, without admitting guilt.

Munich prosecutors are now alleging in a criminal case that the bank's managers, including Mr. Fitschen, who in 2002 was then a mid-level manager at the bank, colluded during their testimony in the civil trial to cover up their involvement in the Kirch bankruptcy, which the bankers deny.

The board's strategy in the Libor investigation, which resulted in the aggravated fine, appeared to have backfired.

Mr. Fitschen, 66, testified for the first time in the criminal trial in Munich on Monday.

The court proceedings are expected to drag on through the summer, and could end up in repeated public appearances by Mr. Fitschen and other former top managers, another public relations blow to the bank.

“I have at no point lied or deceived in relation to the Kirch case,” Mr. Fitschen told the court. Mr. Fitschen and his co-defendants, including former chief executives Josef Ackermann and Rolf Breuer, must attend weekly hearings that are to run at least until September.

Despite the pressure both co-chief executives are under, there are signs that the shareholders' meeting, while unpleasant, will lack the critical mass to force their ouster.

Mr. Nieding, the DWS shareholders' group spokesman, said he still supported Mr. Fitschen despite the trial, and also backed Mr. Jain.

“Herr Fitschen is hugely important for the bank’s connections in its main market Germany. Herr Jain stands for international investment banking and is the go-to man for the international capital market,” Mr. Nieding said.

That could change, however.

“If Herr Fitschen were unexpectedly convicted in Munich and if further problems were to come up from the investment banking division, then one will have to ask if the duo can go on unchanged,” Mr. Nieding said.

Besides, regulatory rules forbid Deutsche Bank having a chief executive with a criminal conviction, he added.

118 2014

Mr. Nieding’s endorsement of the two chief executives was decidely more ringing than the bank’s own supervisory board chairman, Paul Achleitner, was able to muster. His backing for Mr. Jain and Mr. Fitschen in a magazine interview over the weekend was positively tepid, so much so that it heightened unease among investors.

When asked whether the two men were irreplaceable, Mr. Achleitner, the former head of Goldman Sachs in Germany and former chief financial officer of Allianz, Germany's largest insurer, told Wirtschaftswoche, a weekly business magazine: “Who is?”

In a newspaper interview published last Sunday, Mr. Jain and Mr. Fitschen ruled out resigning.

One large investor grumbled: “One would think peace and quiet would be their top priority now; instead we’re witnessing these goings-on.”

Against this background, Thursday’s annual general meeting is expected to deliver a stinging rebuke to the management board.

Usually, votes at such meetings in Germany resemble the election results of communist East Germany.

Results of 95 percent and above to accept the work of the management board are the norm.

This time, however, Deutsche Bank is bracing for a no vote from more than 20 percent of shareholders when it comes to approving the work of management. That would amount to a vote of no confidence, albeit a symbolic one, because only the supervisory board can oust the top managers.

Even the bank's most vocal critics don’t expect it to come to that.

“An approval vote of less than 90 percent is a slap in the face for a German management board,” said a big investor, who declined to be named. “But as long as Jain und Fitschen get over 50 percent, nothing will happen to them. They all give assurances that they’ve understood the warning and that they’ll try even harder in future.”

At least that has been the logic in the past that has ruled uncomfortable corporate successions at Germany's largest companies. Whether those rules still apply to Deutsche Bank, one of Europe's largest financial institutions, will become clear later this week.

 

Daniel Schäfer is the head of Handelsblatt's finance section. Michael Maisch is the deputy head of the section. Sven Afhüppe is the co-editor in chief of Handelsblatt. To reach the authors: [email protected], [email protected] and [email protected]