June 4, 1999 was a warm, sunny day in Frankfurt – perfect for the open-air party that Deutsche Bank hosted in front of its twin tower headquarters in the heart of the German financial capital.
Hundreds of employees gathered in front of a huge video screen blasting footage from New York back and forth. They drank Miller beers, ate hamburgers and watched giant balloons rise to the sky.
The presentation of Americana was a celebration of the $ 10 billion acquisition of Bankers Trust, a Wall Street institution that promoted Germany's largest lender to the global league
Two decades later, Deutsche Bank announces a dramatic one Unravel this eager expansion. After a five-year decline in the Group's investment banking business ̵
Restructuring of parent and branch offices could result in lost up to 20,000 jobs "- the Germans is the second since the global financial crisis – and has cost up to 5 billion EUR It will be the fifth strategic plan in just seven years, reflecting the difficulty of Germans. It has come to terms with tighter rules, a series of scandals and the blunt truth that it is without a top 5 investment bank that has made profits for 15 years has given it a few other franchisees to call on.
A top 10 shareholder who was informed about the plan seems confident describing Mr. Sewing's vision as a "bold strategic reorientation." The bank's 90,000 employees, their angry investors and Europe's largest economy, in d he anchors her, hoping he is right.
The investment banking adventure should not end this way. When Deutsche Bank unveiled the Bankers Trust deal, developed by Edson Mitchell, head of emerging investment banking, a nearly ten-year boom set in until the 2008 financial crisis. After the trust was acquired, his protégé Anshu Jain built one of them The world's best fixed income specialist dedicated to the wave of increasingly complex derivatives structures that brought the Germans soaring profits, high bonuses, and reluctant respect for Wall Street's established names.
"It was an inspirational place to work," recalls a former executive.
But the rapid expansion of the German investment banking business overshadowed everything else. The low-income private and commercial bank of the group in Germany, which has to assert itself in a market dominated by cooperatives and savings banks, which do not seek to maximize returns, as well as their asset management branch was starved of investment.
The pace of growth in investment banking also exceeded the Group's ability to manage it through effective compliance and risk management functions. The rapid hiring of employees, made possible by being paid more than their competitors, led to a mercenary culture.
Although Germany performed better in 2008 than many others, the subsequent crackdown on the government proved fatal to its business model. The decision to force banks to fund their businesses with less debt and more shareholder equity proved catastrophic for the Germans, whose pre-crisis record was one of the world's most heavily indebted.
Over the last decade, the company has had to raise more than € 30 billion in equity, twice the market value of the bank today. At the same time, profits have shrunk as demand for fixed income and interest rate products has declined. The net result: A collapse of both the Bank's return on equity and investor confidence that it can regain.
"The Germans are not investable today for most active fund managers and will not change quickly," says a top shareholder. "It's a 10-year task to reposition this bank."
Four senior executives have not managed to stop the rot in just over four years. Mr. Jain, who was co-managing director until mid-2015, was slow to realize how the new regulatory capital requirements would be disruptive. His successor, John Cryan, strengthened capital and made some cuts, but expanded the franchise on loss-making stocks, implemented the strategy, and was undermined by high-ranking counterparts. Countless litigation and compliance shortcomings. It had to pay US $ 7.2 billion fine for the mis-selling of US mortgage securities and was punished for helping to wash $ 10 billion of dirty money out of Russia rival Commerzbank failed. In parallel with the merger talks, Mr. Sewing and his advisors had been working on a "Plan B" since mid-December. The task was to devise a plan to escape from what his own CFO has called a "vicious circle" of declining revenues, stubborn costs, falling credit ratings and rising financing costs.
Shareholders were disappointed at an angry annual meeting in May. Under the chairmanship of Paul Achleitner, a fall attempt was aborted, but the directors were still given the support of three-quarters of the shareholders at the annual vote on the proper performance of their duties – well below the approval rates of over 90 percent are normal for German companies.
Mr. Sewing knows that the modest cost reduction he has made since starting work 15 months ago was far too timid. Even before his appointment as chief executive, he realized that the group's investment bank was overly dominant – he wrote a strategy paper outlining most of the upcoming restructuring. "We lost our balance," he told The Financial Times two years ago. "It was good to be international. It was good to expand in investment banking. But we have overdone it. "
Encouraged by mounting pressure, he now seems to have brought his board and regulators back to terms for a profound overhaul. He also appears to have the backing of a once disparate group of top shareholders – consisting of US activists Cerberus and Hudson, two wealth funds from Qatar and BlackRock, the world's largest asset manager. In fact, several other major investors have been campaigning for such a plan for many months.
"Everyone knows there is no time left for incremental optimization," says a leading European politician. "This must be a radical plan."
Directors could discuss details of Mr. Sewing's restructuring plan as early as Sunday . Provided it is approved, the German that emerges from the overhaul will look very different from the bank of the past two decades. Much of the group's ill-fated US expansion is being cut back, and several tens of billions of dollars of complex derivatives are being sold, driving the group toward a more prosaic corporate and asset management business.
"It de facto kills the wrong mantra of [Deutsche as] the & # 39; Goldman Sachs of Europe & # 39; "Davide Serra, founder of a major investor, Algebris recently said.
The process will be painful. Up to one-fifth of the total staff was eliminated, with US and UK operations being the worst hit.
The decline, however, seems to be overdue. The German investment bank employs 38,300 people, as many as Goldman Sachs, although the Wall Street Bank generates 1.5 times the turnover of its German competitor, emphasizes JPMorgan analyst Kian Abouhossein. The investment bank's operating costs have consumed 95 percent of its revenue over the past year. compared to 55 percent at market leader JPMorgan. Between 2012 and 2018, the entire Group generated a cumulative net loss of € 6 billion.
In Germany's retail stores, where Germans have lost 2,000 jobs each year since the end of 2017 due to attrition and voluntary redundancies, extreme cuts are difficult given the country's stringent labor laws and the unions' strong role in Deutsche Bank's supervisory board. The group has promised the unions to avoid at least until mid-2021 dismissals.
The cuts in investment banks will focus particularly on equity trading outside of continental Europe – with an estimated loss of € 600 million per year. The German can close the unit completely. Executives have been talking with competitors such as BNP Paribas and Citigroup about the sale of assets or entire units, although potential buyers are reducing the likelihood of doing business.
Some of New York's leading New York executives have already disappeared or are expected to retire as a result of the restructuring, which increases the high-level staff outflow that the bank has encountered in recent years. Mr. Sewing and his team are also keen to downsize or close other international hubs such as Dubai and Johannesburg.
On the other main plank of the restructuring, the bank will outsource more than EUR 50 billion of risk-weighted assets to a new bathroom bank. Mr. Sewing – a former risk officer, who came to Germany as a trainee in a branch in the Westphalian city of Bielefeld – wants to liberate the bank from long-term derivatives, which were concluded in the boom years. Profits from these transactions were booked in advance, which earned big rewards to those who arranged the deals. But they will tie up capital for the next 20 or 30 years.
The most famous victim of the Rejig will be the top investment banker of the Germans, Garth Ritchie, who has been with the company for 23 years. It is almost certain that he will leave the bank over the weekend and Mr. Sewing will take over his duties. Chief Regulatory Officer Sylvie Matherat, who has led a series of embarrassing and costly money laundering matters, is also scheduled to leave, two people told the FT.
Some fear that the severity of cuts in international business could affect Germans' ability to serve customers at home. "There is a significant difference between the reduction and complete closure of the non-European equity capacity of the Germans," says Jernej Omahen, an analyst with Goldman Sachs. "A definitive closure [of the US operation] would raise questions about its ability as a global investment bank for the European corporate client base to act. "
A former member of the board however, thinks about the overhaul of Mr. Sewing after being too little, too late: "The problem of Germans has always been a lack of determination," he says and sits down his term of office for a swift action. "I said, bite the bullet, take the losses, keep going, and stop wasting time – free mind and balance," but we were ignored.
To offset the staggering cuts in the investment bank, Deutsche plans to expand its Asset Management and Transaction Services division, which includes cash management and trade finance. The latter is aiming to double its profit to EUR 2 billion by 2022. In asset management, Mr. Sewing has set himself the goal of making his DWS brand one of the "Top 10 in the world". That would mean doubling assets under management to € 1.4 billion.
The merger of the DWS with a rival asset manager like the comparable division of Swiss bank UBS would be a way to do that. Talks have been going on for months, but they're stuck in a dispute over assessment and control.
According to those involved in the process, the bank has convinced supervisors that its core capital ratio is the most important measure of its financial strength – likely to fall by around one percentage point to around 12.7 percent and release 3.5 billion euros. According to Citi analysts, the spin-off of risk-weighted assets of EUR 50 billion via the new Bad Bank could release a further EUR 6 billion in capital.
Whether the plan can really solve the profound problems of Germans is the biggest question of all. Despite support from some of the bank's largest investors, other leading Financial Times shareholders have said they remain concerned that the lender lacks other companies with sufficient profitability.
ability to generate organic capital, "says Citi analyst Andrew Coombs, pointing out that a new wave of even stronger capital requirements is pending.
"This [restructuring] is the last bullet," adds a senior regulatory official. It's general optimism among supervisors that the plan can succeed. Before its 150th anniversary in March, the party atmosphere of 1999 seems to be almost absent again: the share price is at record low and is more than 80 percent below the level of 20 years ago. But if Mr. Sewing's plan can at least restore the stability of the 130 years prior to the Bankers Trust Deal, this could be reason enough to celebrate.