If John Cryan’s time at Swiss bank UBS is a guide, Deutsche Bank is in for a major downsizing.
The British banker, who took over as chief executive of Germany’s largest bank in July, is credited with laying the groundwork that turned UBS from a state-supported financial welfare case into an asset-management behemoth in just a few years after the 2008 financial crisis.
But according to people familiar with Mr. Cryan in Zürich, Mr. Cryan did much more than that. He also helped change the character and culture of UBS, opening up its books to greater scrutiny and abandoning the idea that UBS could be a major global bank that was all things to all people.
That cultural change started with being brutally honest about the bank’s dire state as well as its many legal sins before the 2008 crisis. It continued with the bolstering of cash reserves to put UBS on a more solid financial footing than peers, and it ended with an aggressive, often painful restructuring that gutted the Swiss bank’s investment banking division, sources said.
Mr. Cryan forced the bank to abandon its unrealistic dream of becoming a global investment banking powerhouse and refocus on what it did best – helping wealthy clients manage their assets.
“For me, it really was a clear strategic shift that UBS carried out. Other banks didn’t go nearly as far. UBS has no classic investment banking to speak of anymore,” said Manuel Ammann, a veteran Swiss banking analyst and head of the Swiss Institute of Banking and Finance at St. Gallen University.
Mr. Cryan’s aggressive cost cutting took UBS from one of the most bloated banks to one of the leanest in the world. The bank’s operating expenses in its investment bank fell from 9.8 billion Swiss francs in 2009 to 6.3 billion Swiss francs by 2013. Its total balance sheet plummeted from €1.351 trillion in 2008 to €883 billion last year.
Insiders said Mr. Cryan didn’t behave as a typical CFO, in many cases acting more as an advisor than manager.
At Deutsche Bank, Mr. Cryan has another bank in crisis to nurse back to health.
After years of tinkering around the edges and widespread criticism that the Deutsche Bank has never generated consistent profit since the crisis, investors hope Mr. Cryan will bring the same kind of tough love to his new job in the Frankfurt financial capital.
Mr. Cryan doesn’t plan to release details of how he will reshape Deutsche Bank until late October, but clearly, the shift is already underway. Handelsblatt, citing unnamed sources, reported last week that Germany’s largest bank will shut its retail operations outside of Europe, including in China, and may reorganize the bank’s management board structure.
Alevizos Alevizakos, who covers UBS and Deutsche Bank as a London-based banking analyst at Keefe, Bruyette & Woods, said the new approach was evident in July when Deutsche Bank released its half-year results – the first under Mr. Cryan. For the first time, the German bank offered public details of some of the legal investigations dogging the institution, one of its biggest existential challenges.
“You can already see the first signs of his idea of how he wants to change the culture at Deutsche Bank,” Mr. Alevizakos told Handelsblatt Global Edition.
To be sure, UBS’ recovery since 2008 can’t be tied to Mr. Cryan’s work alone. A bank’s chief financial officer tends to be more navigator than captain, according to Mr. Ammann, and in Switzerland Mr. Cryan implemented a strategy laid down by his boss, UBS Chief Executive Oswald Grübel.
But insiders say Mr. Cryan played a crucial role at UBS, lobbying for his own vision of what the bank should become. While Mr. Grübel, who became UBS’s chief executive in 2009, initially argued that UBS needed “better management” than wholesale change, Mr. Cryan pushed for something bigger.
“Cryan was one of the first at UBS who advocated slimming down investment banking and ending proprietary trading,” said a former manager at UBS, who worked with Mr. Cryan during his time at the Swiss bank, but declined to be named for this story.
Mr. Cryan also demanded UBS put more money in reserve to guard against a future crisis – anticipating what global regulators would later force all big global banks to do. In 2010, he advocated UBS hold a 16 percent capital-equity ratio – a much higher requirement than most of his peers at the time, according to a Euromoney magazine survey.
When he took over as CFO in 2008, Mr. Cryan was tasked with cleaning up the finances of a bank on the brink of disaster. UBS had posted losses of more than $50 billion in U.S. sub-prime mortgages and other loans, forcing the Swiss government to bail out the institution with the same amount. Clients had withdrawn some 250 billion Swiss francs in cash. Confidence was at an all-time low.
There was no doubt UBS needed tough love to get back on its feet. Appointed chief financial officer in September 2008 to sort out the subprime mortgage mess, Mr. Cryan offered a bracing dose of reality to anyone who cared to listen.
“He did have a tendency to highlight the darkest clouds on the horizon,” Rainer Skierka, a senior banking analyst for J. Safra Sarasin in Zurich, told Handelsblatt Global Edition.
Mr. Skierka recalls a candid moment when Mr. Cryan took him aside during one of the many meetings held with investors.
“He asked me, ‘Do I come across too negatively?’ and I answered: ‘There’s a difference between reality and a negative reality,’” Mr. Skierka said. “He smiled at that.”
Before becoming UBS’ chief financial officer, the understated British banker made a name as a detail-oriented manager with deep knowledge of the sector and its complex financial products. That talent helped him rise through the ranks to head the bank’s Financial Institutions Group, managing relations with other banks that UBS served as clients.
It was that attention to detail that prompted then-UBS chief executive Marcel Rohner to call on Mr. Cryan when the bank got into serious trouble with subprime mortgages. He was promoted to chief financial officer in the same month that U.S. investment bank Lehman Brothers went bankrupt.
“That was the thing that everyone admired about him, the fact that he was very honest to all interested parties,” said Mr. Alavizakos. “He was very, very granular in the way that he provided information to the investors.”
Such openness was unusual in the immediate aftermath of the crisis, Mr. Alavizakos said, and most banks were initially very closed about their financial problems.
Mr. Cryan’s transparent approach served UBS well in the aftermath of the crisis.
Mr. Cryan and others at UBS acted as something as a “whistleblower” for the banking industry as the bank became a forerunner in cooperating with regulators who were investigating global plots to rig currencies and interest rates, Mr. Alevizakos, the Keefe, Bruyette & Woods analyst, said.
The strategy paid off and UBS avoided some of the biggest fines for wrongdoing, while Deutsche Bank, for example, was handed a record $2.5 billion fine for its role in the Libor rate-rigging scandal, in part for not cooperating fully with regulators.
Over time, Mr. Cryan’s power and influence within the UBS grew. By the time he left in June of 2011, the chief financial officer’s responsibilities included areas such as process and taxes worldwide. More than 1,000 people within the bank worked for Mr. Cryan.
He also took on the role of interim chief of Europe, Middle East and Africa.
Insiders said Mr. Cryan didn’t behave as a typical CFO, in many cases acting more as an advisor than manager. In fact, as brilliant as Mr. Cryan was in his analysis, the day-to-day management of his troops was not one of his strengths, one manager said.
Nor did he take much of the credit for the turnaround. That went to the chief executive, Mr. Grübel.
For this and other reasons, he clashed repeatedly with Mr. Grübel, a former UBS manager said, but then so did many people at UBS. Still, it may have been part of the reason he left the bank after less than three years in 2011: “Cryan said from the beginning to Grübel that he didn’t want to do the job for a long time,” the manager said.
By the time he left UBS in 2011, some measure of confidence in the Swiss bank had returned: In the first quarter of that year, clients sent more than 22 billion Swiss francs back into UBS, the most since 2007. In 2010, the bank reported its first annual profit in four years.
It’s an impressive turnaround that observers said was not just about luck, or a natural rebound after hitting rock bottom during the crisis. It also came at a heavy cost. By the end of 2010, the bank had shrunk its balance sheet by a third from its height before the 2008 crisis – some 7,500 bankers were let go by the end of 2010.
Most analysts credit the bank with aggressively going after its biggest problems – remaking the core of the bank by shifting its major source of profits from investment banking to asset management. It’s a strategy started under Mr. Cryan and continued by his successors over the last few years.
“Strategically, UBS managed to depart relatively painlessly from investment banking as its chief source of earnings. This transition was handled with determination,” said Mr. Skierka, the J. Safra Sarasin analyst said. While Mr. Cryan may not have been the one to devise the strategy, he acted as its “navigator,” shifting funds from one division to another.
People familiar with UBS say that the risky strategy made sense and returned UBS to its historic roots as an asset manager. But that doesn’t mean it was a simple choice. Rival Swiss bank Credit Suisse, for example, has a similar history to UBS, but maintained investment banking as a pillar of its business.
By the end of 2014, UBS had $2.04 trillion in assets under management, according to an annual study by London-based consultants Scorpio Partnership, making it the largest asset manager among banks and breaking the $2 trillion mark for the first time. Deutsche Bank ranked 12th in asset management, with just $293 billion. In the first quarter of this year, UBS posted its largest quarterly profit in five years.
Could the same strategy work at Deutsche Bank?
Analysts say Deutsche Bank doesn’t have the same rich history that UBS does in asset management. Germany’s largest bank earns nearly half of its profits from investment banking at the moment, and would clearly be playing catch-up in a field that is becoming increasingly crowded.
“I don’t think that Deutsche Bank is in the same position as UBS,” said Mr. Ammann of St. Gallen University. Nor does that have to be a bad thing, he added: “It’s not as if investment banking is bad per se, and wealth management good. One can’t just say that all banks should focus on wealth management.”
Instead, the challenge for Mr. Cryan at Deutsche Bank will be to strike the “right balance” between cutting back on the less profitable elements of its investment banking business, while continuing to build up its own asset management department, said Mr. Skierka of J. Safra Sarasin.
I’m pretty sure that Mr. Cryan would always be ahead of the game, but unfortunately for him the situation is very uncertain at the moment. Alevizos Alevizakos, analyst at Keefe, Bruyette & Woods
“You tend to fall into a profit hole during the initial restructuring phase,” said Mr. Skierka. “The question is whether, as a latecomer to the international asset-management business, they can still have success.”
The other question is whether Mr. Cryan will push Deutsche Bank to shore up its own capital base, like he did at UBS. On his first conference call with financial analysts in July, Mr. Cryan said he didn’t see a need for the bank to seek more capital from investors – for now.
Yet Mr. Alevizakos, the Keefe, Bruyette & Woods analyst, said there is still a 50-50 chance that may change in the coming months or years. The conundrum is that Mr. Cryan wants to have a clear plan before he announces any such move. After two capital increases in the last few years, Deutsche Bank would need to have a crystal clear reason for demanding a third round of cash from investors.
“I’m pretty sure that Cryan would always be ahead of the game, but unfortunately for him the situation is very uncertain at the moment,” said Mr. Alevizakos, citing the bank’s thousands of open legal cases as the biggest and most uncertain bottom-line risk.
Nor is Mr. Alevizakos convinced that Mr. Cryan will be able to take the same approach he took at UBS in terms of turning the bank into an asset management giant.
“Cryan has inherited a business that is very geared towards investment banking,” said Mr. Alevizakos “The problem is he doesn’t have the kind of standout other division that could be his Plan B, like UBS did.”
Christopher Cermak is an editor at Handelsblatt Global Edition in Berlin, focusing on the financial markets. Holger Alich is Handelblatt's Switzerland correspondent, covering the financial industry. To contact the authors: [email protected], [email protected]