Deutsche Bank’s new CEO, Christian Sewing, has spent almost his whole career in this curious institution, renowned for its split personality.
Is it a German commercial and retail bank, as sections of the German press and political world have always wanted it to be? Or one of the most impressive of global investment banks, as some of its storied leaders such as Hilmar Kopper, Edson Mitchell, Joe Ackermann and Anshu Jain desired?
Since the acquisitions of Morgan Grenfell in 1989 and Bankers’ Trust in 1999, the answer has been: both. For chunks of the past 30 years, Deutsche was the most feared competitor in certain areas of fixed income, and debt underwriting, as well as a bulge bracket equity capital markets firm.
At one stage, when head of Deutsche’s investment bank in the 1990s, Mitchell demanded that the firm be top two or three in all its markets.
But the financial crisis has not been kind to investment banks, and the post-crisis recovery has been particularly harsh on European banks.
Deutsche has lost money in each of the past three years; perhaps worse, net revenue fell 12% last year, and 15% in its investment bank.
Even in their home markets, European players have been pushed back by the monster strength of the US Big Five. Deutsche is now less often to be seen in the top 3 of league tables.
But as the table below shows, Deutsche is still in the top 10 globally for almost every major investment banking discipline, except for investment grade loans and MBS.
As such, it remains a vital part of Europe’s challenge to total US dominance. In every market, Deutsche contributes between a fifth and a third of what European banks still do in the top 10.
Global market in 2017
European banks' share of total activity of top 10 banks (%)
Deutsche's contribution to this (%)
IG corp bonds
Source: GlobalCapital research using Dealogic data
More than patriotism
Does it matter whether European investment banks are among the world’s best? It is hard to prove objectively that it does.
European clients can be and are served by US or other intercontinental institutions; innovation and skills can be developed in Europe’s financial centres even if the employers are American.
But perceptions matter, as do soft effects such as public attitudes to industries in which there is a national champion.
Germany — and Europe — without a strong Deutsche Bank would have a different relationship with investment banking.
And when there is a crisis, every bank tends to retreat to its home market. It would be well for Europe to have some fully qualified banks whose home market was Europe.
What Sewing decides to do about Deutsche’s investment bank therefore matters, not just to the Deutsche employees who have put up with years of angst, strife, uncertainty, market turmoil, long-deferred bonuses and sometimes no bonuses.
Road still forked
Usually when there is a leadership crisis at an investment bank, it is fairly clear what the ejected CEO — in this case John Cryan — was trying to do, why the stockmarket or other stakeholders were unhappy, and which direction the bank would go in next.
With Deutsche, none of that is as clear. Cryan’s strategy, backed by the chairman Paul Achleitner, was a middle way — keep investment banking but get tough on costs. Achleitner seems to have lost patience with Cryan’s execution, rather than his course.
The divisions among other stakeholders on which way Deutsche should turn — towards or away from investment banking — are as stark as ever. Some shareholders, equity analysts, employees and managers favour one route, some the opposite.
Which side is Sewing on?
Time for wisdom
So far, the signs are mixed. The retirement of Marcus Schenck, which according to an associate quoted by the Financial Times was prompted by his dismay that the investment bank was not getting enough resources, is ominous.
But in Sewing's letter to employees yesterday — unusually vigorous, readable, clear and free of waffle as these things go — he issued a call to action. Employees must put team spirit at the heart of what they do and put clients first. Revenue and cost targets will be strictly enforced and bureaucracy reduced.
When it came to the corporate and investment bank, Sewing spoke approvingly of the fact that Deutsche was “doing well in important business areas globally” and had recovered market share in key areas. But he signalled that the bank would “thoroughly analyse how we want to position this pillar of our bank” and “free up capacity for growth by pulling back from those areas where we are not sufficiently profitable”.
Something needs to be done. Compensation and benefits cost only 30% of the investment bank’s net revenue last year — but general and administrative expenses soaked up another 62%.
Those who care about European investment banking will be hoping that the cuts and restructurings Deutsche makes are like the many rounds done over the past decade by the major US investment banks — probably tough and painful at first, but allowing the bank to focus better on its core strengths and return to growth.
There are no obvious runt divisions — Deutsche’s investment bank has a good balance between transaction banking, origination, advisory, financing and sales and trading.
What Sewing should avoid is a too-radical reduction in scope, either geographically or by product, that would clip Deutsche’s wings and knock it out of the list of global investment banks.
Barclays has signalled strongly that its main markets are now the US and UK. This is working: Barclays is ahead of Deutsche in every major league table bar ECM — even in covered bonds.
But what Europe needs is banks that can one day get back into the top five, and for that, global ambition is necessary. Think big, Christian!