Deutsche Bank made a familiar mistake by appointing Christian Sewing CEO

By now, it appears that John Cryan’s position as CEO of Deutsche Bank has been entirely undermined. The Supervisory Board is holding a meeting on “succession planning”, according to media reports, and the latest suggestion is that a board meeting this afternoon will announce the appointment of Christian Sewing, a man who has spent nearly his entire career at Deutsche Bank and the former head of audit and current co-deputy CEO and head of the Private and Commercial Banking business line.

If this turns out to be true, it would send a negative signal to the whole investment banking franchise; Mr Sewing’s career path has been in credit risk and commercial banking, and his appointment would mean that all the investment banking-oriented candidates (Jean-Pierre Mustier, Richard Gnodde and Bill Winters, all mentioned a few weeks ago) have been passed over. So too will his co-deputy and head of the investment bank, Marcus Schenk. It is hard to see this other than as marking a change in strategic direction, which would most likely lead to senior resignations and widespread job losses in the trading and advisory business.

Observers with a cynical cast of mind might be forgiven for thinking that this is a pattern that we have seen before. A bank hit by a constant series of scandals, seemingly unable to make an acceptable return from a once-lucrative but never top-ranking fixed income franchise, runs a selection procedure to replace an internally revered but embattled CEO who has lost the confidence of the board, gets turned down by a number of prestigious external candidates and then decides to go for the internal candidate with the least degree of connection to its tainted past … this looks very much like Anthony Jenkins at Barclays, does it not?

If Mr Sewing’s tenure follows the same pattern, we can expect to see a lot of apologies for the past, a lot of declarations of a return to basics, successive rounds of job losses at the investment bank, a CEO turning down his own bonus after missing targets, and, eventually, a fundamental disagreement over the board on strategy and the appointment of a new CEO very much in the mould of the candidates who were not given the job this time. Although Mr Jenkins achieved many of his goals in cutting the cost base and rebalancing Barclays’ revenues, his time at the top is not remembered fondly by investors, employees or anyone else.

Compared to Barclays in 2012, Deutsche in 2018 has advantages and disadvantages. On the one hand, it is reasonable to believe that the capital base is now stabilised, and that the flow of conduct scandals may have at least slowed if not fully abated. But conversely, unlike Barclays’ UK franchise, German retail and commercial banking is not a fundamentally profitable business in a cyclical dip. Deutsche’s PCB business made a return on equity of 2.0% in 2017, in economic condtions in Germany which are about as good as they can get. Mr Sewing has deservedly been given the credit for execution of a difficult redundancy program, but the cost/income ratio in 2017 was still 93%, up from 83% in 2016. It is hard to see a viable “boring” banking franchise in a market where retail clients hate to borrow money, and where pricing is set by co-operative and state-owned competitors.

With a powerful Chairman (Paul Achleitner) looking over his shoulder, it is hard to be very optimistic for the Sewing era at Deutsche.

Dan Davies, is a senior research advisor at Frontline Analysts and a former banking analyst at Cazenove, Credit Suisse and BNP Paribas.

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