Stake in Sewing Brave US investor takes a bet on Deutsche Bank

Hudson Executive, an American hedge fund, has made a surprising investment in Deutsche Bank and is on board with CEO Christian Sewing’s new strategic plan.
Relax, Sewing. This is good news.

A rare breed has been sighted in the wilds of finance: an investor with faith in Deutsche Bank, Germany's largest lender. Hudson Executive, an American hedge fund, turned heads this week by announcing it had snapped up a 3.1 percent stake in the troubled bank.

Despite Deutsche's continuing losses and diminished share price, Douglas Braunstein, the fund's boss, chose to focus on the “outstanding possibilities” that his company claimed to spot amongst the wreckage. The move is all the braver after the bank reported disappointing third-quarter results this week and revised down its earnings targets for 2018.

Deutsche's new CEO, Christian Sewing, is revamping operations in a bid to return it to profitability after three years of losses. But in a Bloomberg survey of 33 analysts, 17 recommended an immediate sale of Deutsche stock after the latest earnings report.

Backing the CEO

News of Hudson Executive's surprise stake gave a huge boost to Deutsche’s beleaguered managers. The share price has risen almost 5 percent since the announcement, although it remains over 40 percent lower since the start of the year.

The purchase makes the US hedge fund Deutsche’s third-largest shareholder, after the government of Qatar and Chinese conglomerate HNA, although HNA has expressed interest in reducing its holding in the medium term.

For the time being, Hudson doesn't want a seat on Deutsche’s supervisory board. “I think we can have most influence from outside,” Braunstein told Handelsblatt, emphasizing that his company was in for the long haul. Deutsche is “misunderstood and undervalued,” he insisted.

The American fund, which controls around $1.4 billion (€1.2 billion) in assets, chose to invest $620 million in the bank after taking a hard look at Deutsche last year. At that point, Hudson decided against investing. The difference this time appears to be the appointment of Sewing, who is considered more willing to make tough decisions than his predecessor, John Cryan.

But other big players obviously don't share Hudson's optimism. In an interview with Handelsblatt, Jamie Dimon, head of US banking giant JPMorgan, ruled out a takeover of Deutsche Bank, although the Americans certainly have the financial muscle to do so. "It wouldn't make sense for us," he said. "If you buy a business just to consolidate it, it is almost impossible to do without killing the patient."

Unrecognized jewels

Braunstein explained Hudson’s thinking in a two-page paper, which suggested he wants to see Deutsche Bank focus on “stable” sectors, including personal and corporate banking, transaction banking and wealth management. Transaction banking is underrated, he said, calling it Deutsche's “crown jewel.”

The Hudson CEO believes that Deutsche will continue radical cost-cutting in its investment banking unit, which was once a massive earnings winner for the bank. And ultimately, Braunstein thinks that unit can be returned to profitability. However, contrary to much speculation, he does not think that a merger with Commerzbank is either imminent or necessary.

In talks with Sewing ahead of Hudson's decision, Braunstein also emphasized the need for a change in how the bank manages its liquidity reserves. Deutsche Bank's boss recently announced that some of that €270 billion in reserves, of which €200 billion is held in cash, will be used to boost the lender's business.

Furthermore, the bank’s Liquidity Coverage Ratio will soon be reduced from 150 percent to a more usual level of 120 percent, and the cash reserve will be invested in stocks, bonds and other instruments. According to Braunstein, this kind of balance sheet readjustment was essential to Hudson’s decision to invest.

Though it must be said that Hudson was not the first but the second American hedge fund to take a stake in the bank. Last year, the private equity firm Cerberus bought around 3 percent of Deutsche stock.

Michael Maisch is based in Frankfurt, where he is deputy chief of Handelsblatt's finance desk. Daniel Schäfer is head of Handelsblatt's finance pages and based in Frankfurt. Yasmin Osman is a financial editor with Handelsblatt's banking team in Frankfurt. Brían Hanrahan adapted this article into English for Handelsblatt Global. To contact the authors: [email protected], [email protected], [email protected]