Deutsche Bank cannot afford further delay to overhaul
Governance protest at AGM should trigger a deep, fast restructuring
Deutsche Bank’s long-suffering shareholders have delivered a clear message to Germany’s biggest lender. The votes at Thursday’s annual meeting, though non-binding, showed investors are losing confidence in both the group’s supervisory board and the management board.
Barely three-quarters of shareholders who voted supported directors, with an unusually low tally of 34 per cent of investors bothering to cast a vote.
Paul Achleitner, the supervisory board chairman who has overseen four chief executives and an aggregate 75 per cent drop in the share price since he arrived in the role in 2012, could soon be forced to find his own successor. But governance is the tip of the problem at Deutsche Bank.
The real ire of shareholders, reflected in Thursday’s votes, runs far deeper. Having rightly walked away from a potential merger with local rival Commerzbank a few weeks ago, the group has yet to outline a convincing new strategy. In that vacuum, Deutsche’s share price has been repeatedly hitting new all-time lows in recent days.
Chief executive Christian Sewing hinted in his AGM speech that he now realises that the surgery on Deutsche Bank must involve far deeper cuts. He has made some headway on trimming costs, but the ambition must be far greater. It must be accompanied by the wholesale withdrawal from uneconomic business lines, such as equities and rates and large swaths of the US operation.
There will be a painful hit to revenues in the short term but if the execution of the plan is effective then the longer-term profit outlook should improve.
Management should equally set out a far clearer vision for businesses in which Deutsche can excel — such as its corporate transaction banking franchise, certain corporate loan niches, key parts of European fixed-income investment banking and German asset management.
It would also be welcome if stalled talks could be revived with UBS over a plan to combine the banks’ asset management units. Only by gaining scale can midsized players like these hope to compete with the dominant behemoths of investment like BlackRock and Vanguard.
To help clarify the future shape of the bank, and remotivate staff, it would help, too, if Deutsche hived off its highest-risk assets — hard-to-value “level 3” assets still amount to €25bn and derivatives exposure tops €300bn — into a noncore unit. The bank, which is finally decently capitalised, may even have enough excess equity to absorb the sale of at least some of this portfolio. That might be seen as unnecessary value distraction, but a clean break has a lot to recommend it, both for its signalling and the clarity of focus it encourages.
Bank executives suggest in private that Mr Sewing’s overhaul could indeed be drastic. One described it as the most radical reorganisation since Bankers Trust, the US acquisition 20 years ago that launched Deutsche’s ambition to be a global investment bank to rival Wall Street’s finest.
Holding the necessary resolve to reverse that strategy altogether — and do it quickly — will be tough. But after a year in charge, juggling legacy scandals and the distracting talks with Commerzbank, Mr Sewing can waste no more time before detailing the shrinkage plan he has hinted at. The longer he delays the more his room for manoeuvre will narrow. Deutsche’s systemically important balance sheet — currently valued at €1.4tn — must not be allowed to spin out of control.