|Deutsche Bank CEO John Cryan|
He might be quietly spoken, reassuringly methodical and stoutly averse to any hint of melodrama, but John Cryan impresses Euromoney most with his sheer chutzpah.
In March, the chief executive of Deutsche Bank laid out his latest plan to analysts like a lugubrious northern English nightclub comedian knocking dead an easy crowd.
“These are refinements and extensions to the October 2015 strategy announcement,” he deadpanned, before pausing and then punching home his killer line, “with one or two major adjustments.”
Cryan announced a reversal of the prior plan to dispose of the dense branch network of low-cost domestic retail bank Postbank that Deutsche acquired from Deutsche Post in the years after the financial crisis, declaring instead his determination to keep this valuable asset – so valuable that no other bidder would pay him for it – and ultimately merge it with Deutsche’s own retail bank.
But that’s not all, folks. To make up for the lost capital he had planned to raise from selling Postbank, he would now be turning instead to shareholders for an €8 billion rights issue.
Here stood a bank chief executive announcing a big capital raise to the very analysts who for most of his time at the top of Deutsche had been asserting he would need to do exactly this, even while Cryan himself regularly denied it.
We think the German market, for the first time in my career, offers the prospect of very good returns for shareholders
- John Cryan, Deutsche Bank
Had he been misleading? In the real world, maybe, but not in the financial world. To be fair to Cryan, no one ever believed his denials and he always added some caveat about not doing an equity deal unless unforeseen circumstance arose.
He had to say this stuff and analysts understand these verbal contortions. He could hardly announce a huge new supply of equity last year while Deutsche Bank’s shareholders trembled over looming settlements with regulators.
But now, with the US Department of Justice bought off with $3.1 billion of civil penalties and $4.1 billion of customer relief over dodgy RMBS deals and that pesky mirror trade thing in Russia sorted for not much more than half a billion dollars, the unforeseen circumstance had finally arrived. Deutsche could now actually do a deal.
Quick, pull the Postbank sale before it gets really embarrassing; call back those banks that have been pitching non-stop for the equity mandate.
What, apologize to the analysts? You must be joking. Who do you think we are paying to underwrite and sell this deal?
Not only did Cryan not apologize to the analysts for finally announcing the very equity raise they had been telling him he must do for 18 months, he actually told them off for not understanding his bank.
Euromoney was rolling in the aisles.
Ever so politely, and actually quite gently, Cryan informed the analysts that they don’t understand asset management and they don’t understand retail banking in Germany.
To draw attention to the first, Deutsche will be IPO-ing a minority stake in its asset management division, which Cryan says is a tremendous performer that has been under-appreciated by the stock market.
Euromoney doesn’t know about the analysts, but we’ve heard enough pitches from asset managers about under-appreciated top quartile performance with low volatility across a diverse range of assets, products and geographies that sounds almost too good to be true. Noted: that Deutsche might also be able to raise capital this way could reassure investors in the rights issue.
But let’s move quickly along to Cryan’s more striking claim to have spotted something that the stock market – and other banks – have so far missed: that being a big retail bank in Germany is suddenly a good idea.
He knows it’s a big call. “We think the German market, for the first time in my career, offers the prospect of very good returns for shareholders,” Cryan says.
While analysts have focused on Deutsche’s lost market share in global investment banking and markets businesses and its rising cost of funds, something important has happened at home. “We have seen a change in Germany,” Cryan says.
He says this is twofold. Negative rates have been so tough for the German Sparkassen with their narrow product focus on deposits and mortgages that “we have seen some consolidation and a return to more rational pricing in Germany”. Presumably, given his audience, he means rational for bank investors not for their customers.
Now, of course, expectations are building in Europe that rates must rise before long. But Cryan’s other hope for retail banking in Germany to deliver juicy gross margins concerns delivery channels.
“We have seen a pickup in e-commerce, digital and mobile,” Cryan claims, and these are areas where Deutsche Bank has been investing heavily as it rebuilds its ageing IT architecture.
Is Cryan telling us: build it and they will come? “Germans may be late adopters,” he says, “but they are adopting now with enthusiasm.”
He argues that Postbank has done a good job on its own of investing in digital banking and that while the group might continue to run separate brands in its home market – the Deutsche blue bank brand and Postbank with its yellow – it aims to merge the back and middle office of both and run these on a single IT system.
“We intend to integrate and that is something we have not attempted before,” he says. “We will migrate to a joint platform, integrate operations, harmonize processes and we see full run-rate synergies of €900 million that will render a cost/income ratio of 65% or lower which has not been seen in Germany before.”
Cryan tells analysts that it will take the rest of this year at least to agree a plan with unions, but that it will then integrate meticulously.
Analysts might shrug off Cryan’s about-turn on the capital raising. And if he can produce strong returns from retail banking in Germany he will be a hero. But his credibility is now on the line. If he doesn’t deliver, his audience won’t be so forgiving next time.