Deutsche Bank The Inspector Is In

In his first comments as the new head of Deutsche Bank, John Cryan told employees of Germany’s largest bank to be prepared for deep cuts and painful restructuring, Handelsblatt has learned.
Getting ready to slice and dice: John Cryan.

No one can accuse John Cryan, the new chief executive of Deutsche Bank, of beating around the bush.

“I won’t tell you that everything will be harmonious and without problems in the coming months,” he wrote in an introductory letter to the Frankfurt-based bank’s 100,000 employees, seen by Handelsblatt.

Mr. Cryan clearly intends to take an unflinching approach toward his new job, which he began on Wednesday. But Deutsche Bank staff must have known what they faced after the abrupt departure of ex-CEO Anshu Jain: restructuring, cost-cutting and job losses.

Unlike Mr. Jain, who was a star investment banker before becoming co-CEO of Deutsche Bank in 2012, Mr. Cryan is known as a no-holds-barred restructuring expert who cut his cloth as a banking consultant rather than a high-profile trader. He is now charged with turning around the fortunes of a bank that has struggled since the 2008 financial crisis under a wave of damaging lawsuits and fines, an unprofitable retail business and demands from regulators to reduce risk-taking in its investment banking unit.

The letter suggests Mr. Cryan doesn’t any have a problem dismantling Mr. Jain’s legacy: On his first day, the 54-year-old British citizen announced deep cuts to Deutsche Bank’s securities trading business – a key part of the investment banking division where Mr. Jain initially made his name.

Trading will no longer be allowed to burn up so much of the bank’s capital reserves. “We cannot afford ourselves this luxury,” Mr. Cryan wrote. “If we reduce this dependency, there shouldn’t be any competitive disadvantage, since the market is already moving in this direction.”

Mr. Cryan apparently wants to stick roughly to Strategy 2020 roadmap, which should please shareholders

Other large banks such as Britain’s Barclays and Switzerland’s UBS have indeed capped some of their trading activities. Mr. Cryan earned himself a reputation as a tough and determined restructurer while serving as chief financial officer at UBS. He took up that post in 2008 shortly before UBS had to be rescued by a Swiss-government bailout amid billions in losses.

Now it's Deutsche Bank’s investment banking unit that will need to be reduced back to a healthy size.

The financial institution had already announced it intended to reduce its balance sheet by a net €150 billion ($168 billion), part of its “Strategy 2020” plans, a massive reorganization of the business that was laid out by Mr. Jain and co-CEO Jürgen Fitschen in April and received a lukewarm reception from investors.

Mr. Cryan, who has the ensuing investor revolt to thank for his new job, might go much further. He intends to take extra months to ferret through the master plan developed by the bank’s previous leadership. Investors and employees will now only hear his new strategy in October rather than the end of July, as had been previously planned.

According to financial sources, Mr. Cryan will also decide by then whether and how he wants to restructure the bank’s board and top management. The long wait is sure to irk many of his colleagues, as some fear it will scare off customers and hurt business.

The investment banker Mr. Jain built up securities trading during his 20 years at Deutsche Bank and that unit still earns the most money for the bank. In the first three months of 2015, revenues there hit €3.65 billion, making up more than a third of the bank’s entire income.

But Mr. Jain resigned after a shareholder revolt and harsh criticism from bank supervisors in the wake of the Libor benchmark rate-rigging scandal, which cost the bank a record $2.5 billion fine as was carried out by traders that were under his watch.

Mr. Cryan, who has been on Deutsche Bank supervisory board since 2013, will lead the bank in tandem with co-CEO Jürgen Fitschen until next May, when he will become the sole chief executive.

The old duo had little luck guiding Deutsche Bank during its three-year term. Though Mr. Jain and Mr. Fitschen were able to boost the bank’s capital cushion, margins were left wanting and penalties for various scandals continued to eat up the fresh capital.

But it’s not just investment bankers preparing for deep cuts: Deutsche Bank is “too diversified and complicated,” according to Mr. Cryan. “Our business model has to become simpler.” In order to achieve that, he intends to shutter those units that fail to meet his new standards.

Mr. Cryan, as a member of the supervisory board, signed off on Strategy 2020, which also calls for retreating from several international markets, selling off retail banking subsidiary Postbank, and closing around 200 of its own branches.

And so Christian Sewing, the manager taking charge of the disappointing retail banking division from the recently departed Rainer Neske, will have  little choice but to cut to the chase in the coming months.

“Overall, Deutsche Bank is not where we want it to be,” Mr. Sewing said, adding that his unit could not simply “continue on” as it had been. With customers shifting to online banking, costs remained prohibitively high, he said.

Even if some changes are in the offing, Mr. Cryan does reportedly want to stick roughly to Strategy 2020 roadmap. That should please most shareholders, though some have called for a more drastic approach that would see the bank abandon its long-held desire to remain a "universal" bank operating in all fields of banking.

“The general direction is correct, now it needs to be rigorously implemented,” said a major shareholder.

Deutsche Bank’s stock surged around five percent after Mr. Cryan took the reins. But even he can’t promise an end to the string of bad news emanating from the bank, which still faces some 7,000 lawsuits stemming from the 2008 financial crisis and its aftermath.

“Our reputation has been damaged by cases of grave misconduct,” he admitted. “As a consequence, high penalty payments have weighed on capital resources and will likely continue to be a burden for some time.”

Deutsche Bank employees might find some solace that Swiss rival Credit Suisse faces even tougher times under its new boss Tidjane Thiam, who started on the same day as Mr. Cryan. Mr Thiam said on his first day that the bank would have to “unsparingly” restructure its activities.

 

Michael Maisch and Michael Brächer cover banks in Frankfurt. To contact them: [email protected] and brä[email protected]