Deutsche Bank risks seeing a five-year decline at its investment bank accelerate if it does not fix its problems relatively quickly, bankers and analysts said.
Deutsche is in the cross-hairs of both investors and regulators. It faces a multi-billion dollar fine from US regulators related to US mortgage-backed securities that could force it to raise capital for the fourth time since the financial crisis. The bank is expected to sit tight before taking action until it knows the scale of the US penalty (see: “Deutsche in risky capital stand-off” and “Deutsche woes reopen AT1 wounds”).
The danger is that Deutsche is already caught in a spiral of bad news, which is seeing clients and staff leave.
“Time is of the essence,” said Goldman Sachs analyst Jernej Omahen, about getting the US settlement finalised. “As confidence erodes, settling before year-end is important.”
Indeed, a Bloomberg report on Thursday that “about 10 hedge funds” have moved to reduce their exposure to the German bank saw the stock fall by 5% on Friday in Frankfurt trading. The story came as speculation grew that the German government might be required to step in to help shore up the bank amid uncomfortable memories of the worst days of the 2008 financial crisis.
Deutsche has already slipped down investment bank rankings in recent years, most alarmingly in bonds and in Europe, both areas of traditional strength (see chart).
It ranks seventh for investment banking fees so far this year, down from sixth in 2015 and 2010, according to Thomson Reuters data. It ranks behind the big five US banks and has now fallen behind Barclays too. In EMEA, it has fallen to sixth this year, from third last year and second in 2010.
Deutsche ranks seventh in bond fees globally this year, down from third in 2010, including a fall to 25th in Asia from seventh in 2010.
It has slipped in most other areas too, including global M&A advisory, where it ranks 11th this year, down from eighth in 2010, according to Thomson Reuters data.
Keep them happy
Other banks, especially those in Europe, have also faced major restructuring or are still making changes, and former Barclays investment bank boss Tom King last year acknowledged the challenge of keeping clients happy during a restructuring.
“As we’ve turned off products, dialled down geographies, reshifted our focus, that’s very disruptive for clients … it takes time to migrate these relationships without breaking them,” King said.
Exit door
Deutsche has also been losing staff.
Some of that turnover has been intended, as part of CEO John Cryan’s plan to axe 15,000 jobs to slash costs and improve profitability.
In remarks to people attending the bank’s leveraged finance conference in Arizona last week, Cryan even boasted about the number of senior staff who have left, saying the bank has seen turnover of 85% of senior managers, one of those present told IFR.
Cryan was speaking as he introduced retired US general Stanley McChrystal, whose firm has been advising Deutsche on leadership issues. That turnover referred to the management board and executive committees of regions and divisions, where Cryan has been keen to introduce new faces.
In the last three months those leaving have included Gunit Chadha, CEO for Asia-Pacific; Jim Ratigan, head of Americas M&A; Ahmet Arinc, head of FX and emerging market debt trading; and its six-strong team of US mining and metals investment bankers (who left for Jefferies).
Other people to go include its heads of regulatory policy, North America interest rates, natural resources M&A, ABS syndicate, Asia high-yield origination and execution and the country head for Russia.
Deutsche recently appointed Mark Fedorcik as head of corporate and investment banking in the Americas, to replace Paul Stefanick, who became chairman of global CIB, the latest in a series of changes in its capital markets business.
The bank downplayed the scale of unwanted departures. “Our attrition levels are better than or flat to last year across our businesses,” a spokesman said.
One senior banker said there was a decent degree of loyalty among staff, but the recent turmoil and upheaval in management had made it difficult and hurt morale.
Another banker said staff were confident about the bank’s liquidity position, but he wanted to see a clearer strategy set out and more Germans on the board and executive committees to ensure the bank responds to the cultural and political dynamics of its home country.
Morale
Morale has not been helped by a halving in the value of the bank’s shares this year – hitting some staff in the pocket.
Deutsche introduced a “Key Position Award” last year to try to keep its star bankers. The KPA bonus is granted completely in shares and is deferred over four years. But part of it is subject to a “share price hurdle”, which only vests if Deutsche shares reach a target price.
The bank declined to say how many staff receive KPAs or what the share price target is, but it is likely to be far above the current price.
Deutsche paid its staff €2.4bn in bonuses last year, and 49% of that was deferred. Just over 60% of bonuses were in the investment bank division.
Changes in compensation rules are likely to have worked in the bankers favour, however. More compensation is now fixed pay rather than annual bonus, and junior staff get more in cash than shares. Share awards typically vest in tranches over four or five years, which could leave staff less exposed to this year’s share price slump than in the past – as long as the share price recovers.
Additional reporting by Davide Scigliuzzo and Helene Durand
