MAJOR SHAREHOLDER Deutsche Bank Goes Chinese

While its new largest investor is going to have a say in all aspects of its businesses, Deutsche Bank faces increased calls for probes into misdoings.
Deutsche Bank cannot seem to bury the past. Picture source: DPA.

It was supposed to be a new beginning, a break with troubles of the past. At the beginning of February, Deutsche Bank's CEO expressed "deep regret" for the scandals of recent years in a public letter on behalf of the entire management board. "We apologize," John Cryan wrote. At that time, he had just resolved some of the company’s most critical legal cases. Since that letter, the bank has been trying to more forward once again.

But key shareholders and proxy advisory services weren’t quite ready to wipe the slate clean. The two prominent proxy advisory services Glass Lewis and Institutional Shareholder Services (ISS) are recommending that, at the bank’s annual general meeting on May 18, investors support the request of a shareholder who wants to work through the past again with the help of external auditors. Handelsblatt has obtained copies of the two consultancies’ recommendations, which Deutsche Bank did not wish to comment on.

ISS and Glass Lewis are considered influential because many institutional investors follow their advice. A special audit proposal for Deutsche Bank, which both services had supported last year, only barely scraped past a majority recently. This time around the three special audits were proposed by shareholder Marita Lampatz, whose husband has long been at loggerheads with Deutsche Bank over the unprofitable Sal. Oppenheim fund.

On Wednesday HNA announced that it has increased its shares from 4.76 to 9.9 percent, at a cost of some €3.4 billion.

With the special audits, Ms. Lampatz wants an external and independent examination of the role of the company’s managing board and supervisory board in two major scandals: the Libor scandal, where Deutsche Bank employees manipulated important benchmark interest rates, and a Russian money laundering scandal, in which Deutsche Bank handled questionable stock transactions for customers in Moscow and London. In both cases, the bank paid high penalties.

The recommendations by ISS and Glass Lewis give Ms. Lampatz's request credibility and access to further support. Karl von Rohr, the head of the bank's legal department, had recently stressed that "intensive investigations" had already been carried out on behalf of the management board as well as for several supervisory authorities.

But the internal investigations aren’t going far enough according to the two shareholder advisory firms. ISS justified its support for the special audits by the fact that the bank is still involved in a series of inquiries and regulatory investigations that "could have a significant impact on the value of the company to shareholders." ISS criticized the "bank’s refusal to publish details of the results of the investigations." ISS said it had significant doubts about the ability of the supervisory board to investigate the potential misbehavior of its own members.

This last sentiment seems to be aimed at Paul Achleitner, whose re-election is up for a vote at the annual general meeting. Mr. Achleitner had come under attack because the British supervisory authority FCA had criticized him for not having forwarded a report from the German financial regulator Bafin. "It remains unclear how and to what extent Achleitner’s role was internally investigated when the bank did not cooperate adequately with the investigations of the British authorities," ISS wrote.

Glass Lewis expressed its own need for more information. They pointed out that in the previous year, a large number of shareholders voted for a similar request from Ms. Lampatz. This shows that a large number of them wanted a "further clarification" about how cooperative the Deutsche Bank management board and supervisory board were in dealing with authorities and in the investigations of the scandals, Glass Lewis said. The special audits would also "help the current members of the management board and the supervisory board to regain the broad trust of the shareholders," the report of their analysis said.

From the perspective of Glass Lewis, investors should also refuse the broad exoneration of the management board and the supervisory board. This is not because the shareholder consultant suspects all top executives and controllers of misdeeds, but it does have concerns over some of them. However, because there are no plans for an individual vote, Glass Lewis is recommending rejection. ISS doesn’t quite go that far. While criticizing the lack of transparency on the results of internal investigations, the concerns are not serious enough to vote against the exoneration of the two boards or the re-election of Paul Achleitner, ISS said.

The chances of success for the special audit proposals depend above all on the stance taken by Deutsche Bank's major shareholders. Blackrock, two funds from the ruling family of Qatar and the new major shareholder, the Chinese business and financial conglomerate HNA, together make up 22 to 25 percent of the votes. If as few shareholders attend the annual general meeting as did in 2016 - when only 36 percent of the voting shares were present - then it would be difficult to achieve a majority over this group.

That the large shareholders have such influence is because of HNA. On Wednesday the conglomerate announced that it has increased its shares from 4.76 to 9.9 percent, at a cost of some €3.4 billion ($3.71 billion). This means that the Chinese have moved ahead of the ruling family from Qatar, which according to the latest figures owns some six percent.

At the beginning of the year, HNA had said it would increase its share, but would remain below 10 percent. Shares above this threshold must be approved by the banking supervisory authorities. Along with this increase of shares comes a desire for influence. At the meeting, the Chinese want to elect Alexander Schütz to the supervisory board. The founder and CEO of the asset manager C-Quadrat manages HNA's Deutsche Bank shares.

The recent increase is noteworthy. After all, the Beijing Foreign Exchange Office has been slowing foreign investment for months in the fight against capital flight. According to the Ministry of Commerce in Beijing, international investment in the People's Republic in the first quarter fell by about half. However, HNA founder Chen Feng has experience managing his conglomerate in difficult political environments. He has expanded what started out as a small airline in 1989 into one of the largest companies in China. HNA has assets worth more than one trillion yuan (nearly €140 billion euros), with holdings in nearly 30 companies.

But the commitment in the financial sector is new. And the role as the largest shareholder of a major European bank is unknown territory. The company’s spokesman declined to comment on the company’s investment in Deutsche Bank.

Yasmin Osman is a financial editor with Handelsblatt’s banking team in Frankfurt. Stephan Scheuer is Handelsblatt’s China correspondent, based in Beijing. To contact the authors: [email protected] , [email protected]