Sew­ing’s op­tions dwin­dle as fresh scan­dals hit Deutsche Bank

Gulf Times Business - - BUSINESS -

Af­ter work­ing fever­ishly for months to ac­cel­er­ate a turn­around plan for Deutsche Bank AG, chief ex­ec­u­tive of­fi­cer Chris­tian Sew­ing has hit a wall.

On Thurs­day, a day af­ter he gave a pep talk to man­age­ment, the bank’s head­quar­ters in­clud­ing of­fices of its en­tire man­age­ment board were searched by po­lice. The shares fell to a record low amid the prospect of yet another costly probe, this time re­lated to dis­clo­sures from the Panama Pa­pers. Days ear­lier, the com­pany was sucked deeper into another money laun­der­ing scan­dal at Danske Bank. The events threaten to ac­cel­er­ate a neg­a­tive feed­back loop of fall­ing rev­enue, de­clin­ing morale and ris­ing fund­ing costs. While many of Deutsche Bank’s largest in­vestors, con­tacted be­fore the raids, said they still back him, they ar­gued he only has another quar­ter or two to prove his ap­proach can work. At the same time, strate­gic al­ter­na­tives are get­ting ever more painful for share­hold­ers be­cause of the low stock price.

Sew­ing told a Ger­man news­pa­per over the week­end that the shares should re­cover soon as Deutsche Bank heads for its first an­nual profit in four years. He said the bank had pre­vi­ously in­ves­ti­gated the is­sues raised by the Panama Pa­pers in co­op­er­a­tion with su­per­vi­sors, and had as­sumed the mat­ter was closed.

As the 148-year-old in­sti­tu­tion con­tin­ues to stum­ble, here’s a look at some sce­nar­ios how its fu­ture may play out.

Sew­ing took over in April with a man­date to ac­cel­er­ate cost cuts, but he has re­cently em­pha­sised ef­forts to in­vest again in growth af­ter years of fall­ing rev­enue. Still, ad­di­tional sav­ings aren’t en­tirely off the ta­ble. The CEO said pri­vately that he’ll re­view his strat­egy if it’s be­com­ing clear that it’s not work­ing, a per­son fa­mil­iar with his think­ing has said. His cur­rent plan has set only vague tar­gets beyond 2019 and in­vestors will likely soon de­mand more de­tail. Fur­ther re­duc­tions to the US op­er­a­tions would be wel­come, two large in­vestors said ask­ing not to be iden­ti­fied dis­cuss- ing in­di­vid­ual in­vest­ments. Wher­ever the bank will shrink, it won’t be at the ex­pense of rev­enue, chief fi­nan­cial of­fi­cer James von Moltke has said.

This is the option that’s been most hotly de­bated in the past year. Cer­berus Cap­i­tal Man­age­ment, the big­gest pri­vate in­vestor in ri­val Com­merzbank AG, a year ago re­vealed own­ing a large stake in Deutsche Bank, too. A deal would en­able the newly formed bank to cut pos­si­bly tens of thou­sands of jobs, hun­dreds of branches and an un­counted num­ber of IT sys­tems, po­si­tion­ing it for higher profit in the over­banked Ger­man mar­ket.

Many top ex­ec­u­tives agree it could make sense for the two to join at some point, ac­cord­ing to peo­ple briefed on their think­ing. But they also say a tie-up would be dif­fi­cult as long as both banks are locked in multi-year turn­around pro­grams. The long, painful de­cline in the share price of Deutsche Bank, the larger of the two, is another ob­sta­cle, though it may make a deal more palat­able to Com­merzbank. Many peo­ple in­side Deutsche Bank pre­fer a merger with a bank out­side Ger­many that would com­ple­ment the Ger­man lender rather than mak­ing big parts of it re­dun­dant. The bank’s top ex­ec­u­tives and its su­per­vi­sory board went through sev­eral sce­nar­ios at their an­nual strat­egy meet­ing in Septem­ber, though in the end de­cided that the time isn’t right.

The big­gest ob­sta­cle to such a sce­nario, again, is Deutsche Bank’s low share price. Any deal at the cur­rent val­u­a­tion means Deutsche Bank may end up as the ju­nior part­ner. UBS’s mar­ket cap­i­tal­iza­tion, for ex­am­ple, is more than twice as high. A higher share price would open more strate­gic op­tions for Deutsche Bank, a key rea­son why top man­age­ment is op­posed to mak­ing a de­ci­sion too soon, ac­cord­ing to one of the peo­ple.

A less dis­rup­tive ap­proach to grow some rev­enue would be a joint ven­ture. Sew­ing has re­peat­edly touted the idea over the past few months as an al­ter­na­tive to bank con­sol­i­da­tion and a way for Euro­pean banks to bulk up re­tail plat­forms against a po­ten­tial threat posed by large In­ter­net firms such as Google, Ama­zon and Face­book. Deutsche Bank has al­ready teamed up with other firms to cre­ate on­line prod­uct of­fer­ings such as the dig­i­tal iden­tity man­age­ment app Ver­imi. But that is a very small start. If Sew­ing re­ally sees joint ven­tures as an al­ter­na­tive to merg­ers, he must have big­ger things in mind. While Sew­ing is try­ing to win over share­hold­ers by show­ing his cur­rent plan is start­ing to bear fruit, he’s been dis­cussing changes that would make a deal sim­pler to ex­e­cute. The lender has been weigh­ing a move to split its core busi­nesses un­der a hold­ing com­pany, a mea­sure that would make it eas­ier to break up in a cri­sis and more ag­ile in po­ten­tial merg­ers, peo­ple with knowl­edge of the dis­cus­sions told Bloomberg in Septem­ber. Im­ple­men­ta­tion would face many reg­u­la­tory and op­er­a­tional hur­dles, how­ever, and CFO von Moltke said the dis­cus­sions were “not strate­gic.”

A hold­ing struc­ture would also make it eas­ier to split up the bank into a re­tail lender and an in­vest­ment bank, which could fa­cil­i­tate an ini­tial pub­lic of­fer­ing or out­right sale of parts of it. A pro­posal for such a split was tabled at the last an­nual gen­eral meet­ing in May. Although Deutsche Bank’s man­age­ment board rec­om­mended vot­ing against the pro­posal, ar­gu­ing that split­ting the bank would dam­age the busi­ness, it still re­ceived more than 5% of the vote.

There’s still a chance that no change in plan will be needed. Some reg­u­la­tors and sev­eral in­vestors agree that it will be hard for the bank at the cur­rent junc­ture to pull off a deal that ra­di­ates strate­gic vi­sion rather than des­per­a­tion, the peo­ple said. If Sew­ing man­ages to stabilise earn­ings — de­spite the fresh head­winds — in­vestors may re­gain con­fi­dence.

Sew­ing has won the back­ing of Doug Braun­stein, the for­mer JPMor­gan Chase & Co fi­nance head whose Hud­son Ex­ec­u­tive Cap­i­tal LLP in early Novem­ber re­vealed own­ing a 3.1% stake in Deutsche Bank. Deutsche Bank’s shares should end up trad­ing about three times higher than their cur­rent level if Sew­ing’s plan suc­ceeds, Braun­stein said at the time, and a merger with another bank isn’t needed to achieve that.

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