Market Skepticism Investors: Deutsche Must Cut Deeper

Some shareholders want Germany's largest bank to make deeper cuts needed to write the struggling financial institution. Whether Deutsche Bank CEO John Cryan can deliver that kind of strong medicine, over the objections of a union workforce, remains to be seen.
Some shareholders in Deutsche Bank are beginning to think that designated CEO John Cryan is not going far enough, fast enough to right Germany's top financial institution.


John Cryan, chief executive of Deutsche Bank, was trying to comfort investors in Frankfurt a few days ago when he said: "We are better than we are currently perceived from the outside."

But there are still difficult times ahead for Germany's largest financial institution. After several U.S. competitors recently warned of shrinking profits in investment banking, analysts at UBS and Barclays are expecting Deutsche Bank on Friday to report that net profit fell by 10 percent to 20 percent during the first quarter from a year earlier.

It's another sign of the challenges facing Mr. Cryan, who was brought in last year to right one of Germany's biggest private sector employers at a time when global banking is slowing down. Now more and more investors are beginning to question whether Mr. Cryan's austerity recipe for Deutsche Bank will be enough to pull it out of a string of quarterly losses and shrinking market share.

One major investor called the situation critical, saying more drastic measures are needed as soon as possible. The bank, the investor said, will probably have to shrink considerably more than is now being planned before it can grow again.

Michael Seufert, an analyst at NordLB, a northern German state-backed regional bank, said if Deutsche Bank's losses persist, Mr. Cryan will come under increasing pressure to speed the restructuring, and cut deeper, into investment banking.


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"At the same time, even tougher cuts may become necessary if more and more divisions start to report losses," said the investor, who declined to be named.

Mr. Cryan's predecessors, Anshu Jain and Jürgen Fitschen, long avoided making deeper cuts, asserting that companies which shrink too much may deprive themselves of the potential to grow again when markets rebound.

But after more than two years of pursuing the light touch, Deutsche Bank brought in Mr. Cryan, a former UBS banker who has proceeded to talk tough about the need for real austerity and a critical rethink, but has also largely avoided the wholesale cost slashing and mass layoffs that often occur in banking sectors in the United States and Britain.


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Some investors especially in Germany are willing to be more patient, saying Deutsche Bank is in a complex situation and there is no quick solution. But other options are thinkable: Deeper cuts in investment banking would be the most obvious, to a partial withdrawal from the United States or even the sale of the bank's big asset management business, which it even considered a few years ago.

However, asset management is now one of the bank's most important drivers of growth, next to transaction banking.

But declines in earnings make some investors nervous. Deutsche Bank already contended with a higher than average drop in earnings in the final period of last year.

Just a few days ago, Mr. Cryan defended the approach taken by his predecessors, which includes Mr. Fitschen, who has stayed on as co-CEO to Mr. Cryan until the upcoming annual shareholders' meeting. Mr. Cryan said Deutsche Bank's problem was not one of strategy but of implementation, emphasizing that it is important to reliably implement his current austerity measures.

But the bank's steep decline in profitability is making investors nervous. And it can't all be blamed on the poor global banking climate. In the fourth quarter, Deutsche Bank said its earnings fell much more than the industry average.

On Tuesday, the chief financial officer of Citigroup acknowledged that first-quarter market turbulence had driven investment-banking earnings down in all regions. Top bankers at Morgan Stanley, JP Morgan and Barclays have made similar remarks.

Daniele Brupbacher, an analyst at UBS, said global banking's biggest weaknesses are in the new issue business for equity and debt capital.

By contrast, the bank's trading business has benefited from the high volatility in markets. But Mr. Brupbacher warned of the negative valuation risk on bank portfolios as a result of lower securities prices.


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On balance, he expects Deutsche Bank to earn €2.6 billion, or $2.86 billion, in the first quarter, which would be 20 percent below last year's figure. The bank is planning to release the financial information tomorrow in Frankfurt.

Since the first quarter is normally the strongest quarter of the year, this does not bode well for the rest of 2016.


Laura De La Motte is an editor at the Handelsblatt finance desk and a specialist banking correspondent.  Michael Maisch is the deputy chief of Handelsblatt's finance desk in Frankfurt am Main. To contact the authors: [email protected] and [email protected]