Neme­sis has come call­ing and its name is Deutsche Bank

The Irish Times - - Business Today - Vin­cent Boland

For much of the last decade, Ger­man politi­cians and bankers have been do­ing the rounds of Euro­pean cap­i­tals, wag­ging their fin­gers at their euro zone coun­ter­parts and urg­ing them to sort out their banks.

Neme­sis has now come call­ing and its name is Deutsche Bank.

This week, as its share price sank to a new low and in­ves­ti­ga­tors pur­su­ing a money-laun­der­ing in­quiry linked to the Panama Pa­pers tax eva­sion dis­clo­sures searched its head­quar­ters in Frank­furt, Ger­many’s largest bank looked less like the epit­ome of Ger­man fi­nan­cial prow­ess and more like the last di­nosaur wan­der­ing the earth af­ter the me­teor struck.

Chris­tian Sewing, Deutsche Bank’s fifth chief ex­ec­u­tive in lit­tle more than a decade, was even forced to ad­dress spec­u­la­tion that it might be a takeover tar­get.

Since the bank’s rev­enues are slid­ing, and it has not re­ported an an­nual profit for three years, the no­tion is le­git­i­mate.

It also speaks vol­umes about the plight of what was once one of the world’s might­i­est fi­nan­cial in­sti­tu­tions.

The scale of Deutsche Bank’s de­cline since the fi­nan­cial cri­sis tore through the global bank­ing in­dus­try a decade ago is best cap­tured in its share price, which has fallen 90 per cent from its all-time high in 2007.

Its stock mar­ket value this week was just ¤16 bil­lion – roughly the same as that of Al­lied Ir­ish Banks and Bank of Ire­land com­bined.

How on earth did that hap­pen? Europe’s weak­est banks were sup­posed to be in Italy, and its strong­est in Ger­many.

Yet a decade af­ter the fi­nan­cial cri­sis, and five years af­ter the euro zone emerged from its de­pres­sion, Europe’s strong­est banks are French, while Italy’s have weath­ered the cri­sis and re­turned to profit.

Ger­many is now the Euro­pean Union’s most un­sta­ble bank­ing mar­ket, and Ger­man banks are among the weak­est in the euro zone.

Deutsche Bank’s plight is the con­se­quence both of its Ger­man home and of its uni­ver­sal am­bi­tions. It is dif­fi­cult to make a profit as a Ger­man high street bank.

The mar­ket is fe­ro­ciously com­pet­i­tive, dom­i­nated by sav­ings banks that are more ef­fec­tive at har­vest­ing the cash of or­di­nary Ger­mans.

This is a prob­lem for Deutsche Bank be­cause – un­like, say, its US ri­vals – it has built its global op­er­a­tions on a weak do­mes­tic mar­ket po­si­tion.

Left with scraps

That ex­plains the tra­vails of the global op­er­a­tions. Deutsche Bank en­tered in­vest­ment bank­ing with the ac­qui­si­tion of Bankers Trust two decades ago.

But Bankers Trust was not a top-tier in­vest­ment bank­ing fran­chise, and Deutsche Bank has failed to turn it into one. In its pur­suit of US busi­ness, it was in­stead left with the scraps, in­clud­ing be­com­ing the go-to lender for a cer­tain Don­ald Trump.

Deutsche Bank’s ac­ci­dent-prone global op­er­a­tions have led to reg­u­la­tory fines and penal­ties of some $18 bil­lion since 2008, ac­cord­ing to Bloomberg.

Yet that is not their only legacy. Since it bought Mor­gan Gren­fell in 1989, giv­ing it a huge pres­ence in Lon­don, Deutsche Bank has been riven by An­glo-Ger­man ri­val­ries.

It tried to over­come these in 2015 by ap­point­ing John Cryan, a Bri­ton, as chief ex­ec­u­tive.

But he was given the boot in April when his turn­around plan was con­sid­ered to have failed.

That de­ci­sion was taken by Paul Ach­leit­ner, the Euro­pean grandee who chairs Deutsche Bank.

Mr Ach­leit­ner then ap­pointed Mr Sewing, a bank lifer and, prob­a­bly more im­por­tantly, a Ger­man.

Real chal­lenge

Deutsche Bank’s real chal­lenge, though, is more deep-rooted.

It is locked into a model of uni­ver­sal bank­ing that looks in­creas­ingly ar­chaic in the post-2008 bank­ing world.

It is wed­ded to this long-es­tab­lished strat­egy, de­spite its man­i­fest fail­ings, yet ap­pears to have lost the tac­ti­cal abil­ity to ex­e­cute it.

One might say, in a rev­er­sal of the usual ac­cu­sa­tion, that Deutsche Bank is all strat­egy and no tac­tics.

One re­sult of this fail­ing strat­egy is a cost base – all

‘‘ Its fate is a po­lit­i­cal headache for Ber­lin be­cause Deutsche Bank’s fate mat­ters for Ger­many

those high street clerks at home and lav­ishly paid in­vest­ment bankers in Lon­don and New York – that ex­ceeds its ri­vals.

Deutsche Bank em­ploys nearly 100,000 peo­ple. Its cost-in­come ra­tio in the third quar­ter of 2018 was 90 per cent, com­pared to about 62 per cent for Euro­pean banks gen­er­ally. (AIB’s was 51 per cent in the first half of this year.)

The shrink­ing of Deutsche Bank mat­ters for the euro zone, since it is a “sifi” – a sys­tem­i­cally im­por­tant fi­nan­cial in­sti­tu­tion.

It is also rea­son­ably well cap­i­talised. The chal­lenge for Euro­pean reg­u­la­tors is not that Deutsche Bank will col­lapse but that it will be­come a dis­rup­tive pres­ence in the Euro­pean bank­ing mar­ket if it con­tin­ues to shrink.

Yet its fate is a po­lit­i­cal headache for Ber­lin be­cause Deutsche Bank’s fate mat­ters for Ger­many.

Ger­man bank­ing cries out for post-cri­sis re­struc­tur­ing, as hap­pened in many other coun­tries. Deutsche Bank tried to lead that process, with the ac­qui­si­tion of Post­bank in 2010.

Now it could end up as its un­ex­pected next vic­tim.

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