Can Cryan halt Deutsche Bank's decline?

Peter Lee
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Deutsche Bank has come to the end of an era. The question is whether or not it is approaching the end of its empire as well? Respected across the industry for his intelligence and integrity, John Cryan needs plenty of both to restructure Deutsche. It succeeded for years in building too large a version of exactly the wrong sort of investment bank for today’s markets. A bank that once had a clear identity in global finance is struggling to present a vision of what it will be in the future.

It was telling on the 2015 results call in January that Cryan discussed the bank’s caution and historically low levels of market risk at the end of last year. With a capacity to run daily value at risk of €70 million, Deutsche had been running under €30 million, less than half its capacity, across the fourth quarter. In a world where prop trading has been curtailed, this suggests that Deutsche has more capacity to accommodate customer risk than it has customers willing to transact with it. 

That is not being cautious amid low volatility for reasons of prudent risk management. That is a business on the edge. Even as Deutsche cuts back, it must now hire the equity sales and research staff to give it this capability to do more customer business. Given the uncertainties about the bank’s own vision for its future business model and low morale, that is a tough ask.

Cryan has set out to ditch the obvious fixed-income businesses that the capital and funding charges of today’s regulatory environment make uneconomic. Deutsche has announced that it has already exited or will exit: market making in uncleared CDS; trading of high risk-weight securitizations; agency RMBS; and even plain-vanilla swaps with other dealers that are not cleared. 

It will cut back from emerging markets and especially from trading and brokerage in domestic securities with local customers.


But there is no playbook for this kind of restructuring. Is he throwing the baby out with the bath water? It may appear rational to exit flow credit. Deutsche was much smaller in that business than in structured credit. And the associated funding and capital charges make running illiquid investment-grade bond positions to support customer orders a tough business to make money from. 

But the move still surprised the market. If the end goal for Cryan is to build some kind of relationship-driven commercial bank with a capital markets capability to service a smaller group of key European clients, then it will be tough to pitch for their DCM business against rival US and European firms that have stayed the course in flow credit.

Focus on execution

Cryan has deliberately set out to talk less grandiloquently and less often than his predecessors – including Jürgen Fitschen, currently his co-CEO and who steps down this year – about the bank’s strategy. Asked at the annual press conference ­that followed confirmation of dire results for 2015 to explain his vision 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." 

Is that it? Is the aim simply to be more narrowly focused, more efficient, better run?

Cryan talks warmly in internal notices about the quality of people at the bank and their loyalty. He may need to practise more inspiring oratory to enthuse them.

And there’s another problem that Cryan must tackle. Jain and his first boss at Deutsche Bank, Edson Mitchell, built up their derivatives-focused, principal-trading powerhouse almost as outcasts inside the bank. They had to prove themselves quickly and decisively to the sceptical German commercial bankers. To do so, they were hell bent on attracting new customers, devising new products and, most important of all, bringing in big revenues. 


Under Anshu Jain: "Everything was built with a derivatives mind-set: retain ultimate flexibility, offer your private and business clients bespoke solutions, not realizing that you would soon need an army of compliance and operations staff to stick with that model"

The group developed a culture that never evolved. And back-office processing capability could not keep pace with front-office innovation. "If we had a cost problem, the answer was always to grow revenues," says one source.

Deutsche insiders tell Euromoney that those business builders are now criticized internally for having run the division for 20 years like a start-up, even after it had grown to completely dominate the Deutsche Bank group. 

Cryan’s task now is to do the deeply unsexy operational management side much better. 

"We built brilliant systems, like Autobahn, fantastic pricing capability, but the back office was rather botched together with tin boxes and string," this source tells Euromoney. "A lot of IT people were retained on contract to come in and do manual reconciliation to the general ledger."

Little-known outside the banking industry, Cryan’s standing within it is such that almost none of his peers question the new chief executive’s ability to stick to the plan and restructure Deutsche Bank.