John Cryan has had a tough time at the top of what was once regarded in some quarters as Europe’s leading investment bank.
It cannot have been fun restructuring a former fixed income trading powerhouse just as volatility dropped to historic lows. Two years of losses caused by misdeeds perpetrated before he was even in charge were another stick in the spokes. Then there was the year of loss caused by tax rules he could not control. And did we mention that the bank is also a leveraged finance powerhouse trapped by increasingly restrictive regulations? Or that its once proud principal trading operation was hamstrung by the Volcker Rule? And what about the American prudential rules that burden Deutsche’s US subsidiary an implausibly high capital ratio.
Whatever personal faults he may or may not possess, it’s been an unfortunate time for Cryan to be running Deutsche Bank. A couple of forces point the other way — Europe’s economy is recovering, EMEA M&A is starting to fire up once again — but the bank’s core trading businesses, like those of its competitors, would have had a tough time in 2017 irrespective of the bank’s restructuring plan.
But it is premature to criticise wholesale Cryan's perforamnce. That restructuring plan is mostly over and there’s definite light at the end of the tunnel.
Volatility is back, boosting market volumes — though whether momentum trading driven by US president Donald Trump’s Twitter feed is as useful to investment banks as genuine two-way flows based on fundamental disagreement remains to be seen.
US deregulation has begun in earnest, with the promise of better treatment for foreign banking organisations, and clear indications from Joseph Otting, head of the US office of the comptroller of the currency, that the country's restrictive leveraged lending guidelines are not long for this world. The Volcker Rule could be torn up too. One of Deutsche’s most senior bankers told GlobalCapital that scrapping the leveraged lending guidelines would be top of his regulatory wishlist — suggesting that the bank’s top tier DCM team could be ready to turn a corner.
With all this to come, why is it coming out only now that the bank is searching for a new chief executive?
It has been a long and bruising road. As this newspaper points out in Southpaw, Cryan has misstepped on several occasions, hurt staff morale, and his persistently dour performance on investor calls cannot have helped the share price. Chief executives are leaders, but they are also a company’s chief salesperson — they have to believe, and be seen to believe, in their organisation.
When Deutsche raised €8bn in new capital last April, could the sight of a glum Englishman cracking a smile have cut the bank’s 32.5% discount to theoretical ex-rights price?
But still, with the backdrop only improving, it can’t be a good time to switch course with a new boss.
A new external hire means at least six months of uncertainty while the bank’s board searches, another six months for the new boss to grow comfortable, and a bout of intense politics over the shape of any new strategy. If there’s a recovery in Deutsche Bank’s core markets, and a more supportive regulatory environment, ditching Cryan for an outside candidate all but guarantees the bank will miss the boat.
An internal promotion — deputy chief executive, investment bank head, and former CFO Marcus Schenck is a prime candidate — would cut the timeline, but would be less likely to be seen as a new broom, and would still generate a flurry of politics and a lack of focus. Marquee hires or big new balance sheet commitments could still end up on hold.
If Cryan’s restructured Deutsche Bank truly can’t perform, in a world where volatility has returned and regulation seems to be easing, then surely he has to go. He will have rolled the dice on a strategy that’s no longer fit for purpose, and it will be time to take more radical measures — be that full-throated recommitment to fixed income trading, like Barclays, or reshaping as a capital-light corporate finance operation like UBS.
But we’re only a couple of months into the stirrings of volatility, deregulation is a long way from working through, and there are interest rate rises to come. Cryan deserves the chance to see his revamped firm perform in more supportive markets, and Deutsche’s bankers deserve a shot at stability, after several tumultuous years. Only if the bank doesn’t deliver in the year ahead should the search for a new CEO go further.