Deutsche Bank's strategic history reflects the enormity of Sewing's task
There's a trend at Deutsche Bank. Whenever the bank gets a new CEO, it likes to say that the old one had no strategy. It's happening to John Cryan. It happened too to Anshu Jain.
However, the accusations are unfair. Both Cryan and his predecessor spent years concocting strategies to improve the investment bank and Cryan in particular was derailed by events.
The new CEO, Christian Sewing and new head of the corporate and investment bank, Garth Ritchie, face an uphill struggle. The choice of Ritchie, in particular, looks curious in light of his long history running Deutsche's continuously weak equities division - which has failed to respond to years of strategic emphasis and investment.
Deutsche insiders we spoke to are mourning the loss of Cryan. "Everyone, 'who wanted to do good,' at DB was behind JC," says one. "It's been a tough few years and the manner in which this was executed seems bizarre."
2010: A hiring spree to boost the equities and commodities businesses
In 2010, Anshu Jain announced that the bank was investing $2bn on hiring and technology for the global markets business in an effort to become a top five player in global commodities and global equities.
2011: Investing in equities, commodities and corporate finance. Rationalizing 'risk management and support activities'
Then CEO Anshu Jain made a seminal strategy presentation in June 2011. You can still see it here. Jain spoke of, 'strategic investments across corporate finance, commodities and equities and related infrastructure spend,' and of, 'rationalisation of corporate coverage, risk management and support activities.'
The crucial chart from this presentation was the one below. Fixed income businesses were to be 'optimized' (read trimmed) or 'maintained', equities and commodities businesses were to be invested in (read grown) or 'maintained'. and corporate finance businesses were to be kept as they were.
Source: Deutsche Bank
2012: 900 people cut from equities and corporate finance businesses in Asia and the EU and 600 people from the infrastructure team. A new program of "operational excellence"
The chart below comes from Anshu Jain's June 2012 strategy presentation. During this presentation, Jain also declared his intention of hiring for the US corporate finance and equities businesses, for flow sales and trading in India, China, Korea and the ASEAN (Indonesia, Malaysia, Philippines, Singapore and Thailand) and for risk. This was after rationalizing risk management activities one year earlier.
Source: Deutsche Bank
Along with its third quarter results. Deutsche announced 'Strategy 2015+'. This required the bank to achieve €4.5bn of savings a year by 2015, along with a return on equity of 12%. Costs were to be cut by: reducing compensation, cutting staff and engaging in 'front to back process optimization'.
In their presentation accompanying the results, Colin Fan and Robert Rankin - then heads of Deutsche's corporate and investment bank, said they'd be investing in FX, emerging markets and electronic trading platforms, turning around European and Asian equities and getting rid of unprofitable clients.
Source: Deutsche Bank
2013: 1,400 people made redundant from the corporate and investment bank and plans to shift 8,000 jobs overseas to low cost locations
When Deutsche announced its fourth quarter results for 2012 in January 2013, the emphasis was all on cutting infrastructure costs. Yes, the bank said it had cut 1,400 people from the CIB, but this was nothing compared to the 8,000 jobs it planned to shift from London, Hong Kong and Singapore to more 'cost effective' locations.
By September, Anshu Jain suggested things were all going well: the investment bank was doing more with less and he was "gratified" by its new efficiency. Unfortunately, however, Deutsche's fixed income sales and trading revenues were falling.
As the year went on, Deutsche continued to cut back office staff in large numbers (1,895 back office staff went in 2013, versus just 562 front office staff) and decided to pull out of commodities trading. By January 2014, it was clear that Deutsche's fixed income market share was in decline.
2014: Deutsche unexpectedly raised more capital - a move designed to put its fixed income business on a firm footing
Deutsche raised €3bn of capital in 2013 and said that was the end of the matter. It came as a surprise, therefore, when Anshu Jain went back to the market for a further €8bn in June 2014. This move, which seriously undermined Jain's credibility with investors, was seen as an attempt to provide the bank with the capital needed to maintain its market share in fixed income sales and trading and to allow it to grow its market share in US fixed income trading, where Deutsche had just made seven senior trader hires.
Just as Deutsche's new US fixed income traders got to grips with their new jobs, the German bank's US aspirations were thrown into question by the July 2014 revelation that reporting errors in the US unit could force it to raise yet more capital. Deutsche was compelled to commit to hiring 500 new compliance and control staff as a result. At the same time, the bank said it was upping its cost cutting program from €4.5bn until 2015 to €6-7bn until 2018.
2015: Compliance hiring interferes with cost-cutting. Two new "Strategy 2020" presentations from both Jain and Cryan
When Deutsche announced its fourth quarter results for 2014 in January 2015, it became apparent that things weren't going to plan. Most notably, €1.3bn of cost savings at the bank had been offset by an identical €1.3bn increase in "regulatory-related spend."
“Our execution and cost reduction programme has not yet delivered the results we were were aiming for,” admitted Anshu Jain.
In April 2015, Jain presented his Strategy 2020. John Cryan, who was then a member of Deutsche's advisory board was said to have had a big hand in it. The (confusing) chart below summarized the approach to the investment bank. Under Jain's strategy, corporate finance and equities were in.
Jain left Deutsche Bank in June 2015 and was replaced by John Cryan. Cryan then made his very own "Strategy 2020" presentation at the end of October. This detailed 35,000 job cuts in total. 20,000 were to be the result of asset sales (eg. Postbank, which employed 15,000 and was never actually divested). 9,000 were to be the result of pulling out of 10 countries (Argentina, Chile, Mexico, Peru, Uruguay, Denmark, Finland, Norway, Malta, and New Zealand). 6,000 were to be the result of dumping contractors as Deutsche sought to reduce its number of operating systems from 45 to 4.
Cryan also said he intended to hire 2,000 people. In the investment bank, the focus was to be on expanding market share in M&A and equity capital markets.
2016: Deutsche struck by concerns over a possible $14bn DOJ fine
Cryan's strategy was struck by several headwinds. For example, it proved much more difficult than expected to reduce the number of the bank's operating systems. By March 2018, instead of four there were still around 34, with all their attendant costs. Worst of all, though, was the sudden threat of a $14bn fine for mis-sold mortgaged backed securities in September 2016, which was then equivalent to 74% of Deutsche Bank’s market capitalization and would have wiped out its equity. At that time, Deutsche was in no position to raise additional capital from the markets, and the prospect of the fine led to a 44% reduction in Deutsche's share price between January 2016 and its nadir nine months later at the peak of the DOJ crisis in September. Deutsche ended the year with a €1.4bn loss.
2017: With the DOJ fine negotiated down, Deutsche tries to recover
In early the DOJ fine was halved to $7.2bn and Cryan raised an additional €8bn in capital. Bonuses were withdrawn for anyone above AVP level in the investment bank for 2016 and (currently worthless) retention packages were paid to key staff. In March 2017, Cryan said the "fun" was returning to Deutsche, but that an additional €3.1bn needed to be cut from costs. Risk weighted assets would be reallocated to the investment bank, said Cryan and there would be a new focus on corporate clients.
At the start of 2017, Deutsche vowed to recover the market share its trading business lost during the DOJ-induced crisis at the end of 2016, but by the middle of the year it was already apparent that this wasn't happening. As the year came to an end, it was clear that Deutsche wasn't in a position to pay generous bonuses. However, the bank was hamstrung by its promise to compensate employees in the corporate and investment bank for its failure to pay for 2016.
2018: Deutsche pays a bumper bonus round, makes 250-500 senior people redundant in its investment bank, starts "Project Colombo"
Deutsche made a loss of €700m for 2017, but bumped average compensation for its senior risk takers back up to $1.8m. The bonus pool as a whole more than quadrupled versus the previous year. In the investment banking division in particular, Deutsche's bankers were very happy. However, the big bonus round emphasized Deutsche's cost problems: 250-500 jobs at director level and above were earmarked for erasure and the bank embarked upon Project Colombo to review its investment banking operations (again) and establish which were profitable and which were not. Cryan was aiming for a 10% return on equity in the corporate and investment bank. In 2017, the RoE for the business was 1.4%.
This, then, is the situation Sewing and Ritchie have inherited. Good luck to them. It's not like their predecessors haven't tried.
Photo credit: fandijki/Getty