Cryan needs to deal with Deutsche’s long-term dilemma

Peter Lee
Published on:

Concerns over Deutsche Bank’s current financial position are a distraction. CEO John Cryan's biggest challenge is to restore trust in the bank’s brand before its core clients are tempted by the overtures of Deutsche’s competitors.

John Cryan has deliberately set out to talk less grandiloquently and less often than his predecessors as CEOs of Deutsche Bank used to about the bank’s strategy. 

Asked to explain his vision at the bank’s annual press conference in late January – perhaps the only interesting question in two and a half hours – he shrugged. "We are a bank. We are a regulated entity. We don’t have much latitude in what we do. We’ve organized in four divisions. We think they all work well together; they have a logic in being together." 

It’s understandable, laudable even, that Cryan would rather stick to executing the plan in hand in a determined and disciplined way. But failure to articulate a vision, at a press conference in which he returned time and again to low morale among employees, felt like a mistake.

Cryan’s advisers perhaps told him as much. A week later a memo to employees, from which most observers concentrated on his assertion that Deutsche remained 'rock solid’ amid concerns that it might not be able to meet coupon payments on its AT1 debt, sought to address what Deutsche might be in the longer term. 

Cryan said: "We want to be the most-respected financial services provider across all customer segments in Germany, our vital and strong home market; the number-one bank for our corporate, institutional and fiduciary clients in Europe; and the best foreign bank in the United States and Asia."

It’s early days, but it’s becoming apparent that even that worthy aim of just executing the strategy that his predecessors set out last April and that he himself approved from his seat on the board, might be harder than Cryan realized. 

Net revenues
Deutsche Bank 

Source: Deutsche Bank

Deutsche Bank is coming late to this task. It is finding, as others have before it, that as it cuts costs, revenues disappear and there is no neat and linear improvement in the cost/income ratio. The bank is now talking about investing in areas where it has already lost too much market share and where it wants to rebuild revenues: areas such as cash equities, where it is now recruiting in research and sales, and in advisory, which is a capital-light business but in most years a lousy cost/income one.

The bank is determined to get risk-weighted assets down, but weak earnings in its core operating business and poor capital generation don’t give it much capacity to take the hit of dumping assets at a big loss, so progress is slow. It can deleverage and shed high-capital-consuming assets that at least earn revenue, but almost as fast as it does so, regulators hit it with higher operational risk-weighted assets (RWAs) in recognition of past regulatory and compliance failures. 

Seven months into a five-year plan, with the two toughest years ahead, and Deutsche appears to be running full pelt only to stand still.

CET 1 ratio vs SREP requirements 

CET 1 ratio vs SREP requirements 600
Source: Deutsche Bank

It needs to get its CET1 capital ratio up to 12.5% in 2018, just to be marginally above the 12.25% demanded by regulators. That would leave it with a much thinner buffer than most banks aim to work with. Today it stands at 11.1% and it might be down to close to 10.5% by the time Deutsche Bank next reports first-quarter 2016 earnings. It wants to reshape the retail bank by listing or selling Postbank, improving the leverage ratio and deconsolidating €40 billion of RWAs in one shot. Deutsche Bank shareholders shouldn’t hold their breath as equity prices, particularly those of European banks, collapse. 

Deutsche Bank wants to grow transaction banking and asset management, in which it is strong in no-growth Europe, by picking up market share in the US and Asia where competition is most fierce.

And it has to do that while fixing the investment bank that still dominates the group. This is the business on which Deutsche grew, from a fading European commercial bank in the mid-1980s into a global giant, over the 20 years leading up to the financial crisis. The still unfolding regulatory response since the financial crisis has set out to crush investment banking. Cryan’s predecessor, Anshu Jain, gambled that as others got out, Deutsche Bank could both grow market share and benefit from fatter margins and he resisted voices on his own board urging him to cut back investment banking.

It is easy to say he got that call badly wrong, not quite so easy to say what he should have done instead.

James Chappell, analyst at Berenberg, sums up the dilemma neatly: "A successful transformation of any banking franchise requires a core business to fall back on and enough capital to change. In Deutsche Bank’s case, its core business is investment banking, which represents 50% of equity, 75% of leverage assets and 50% of profits. However, investment banking is in structural decline."