Restructurings and job cuts have become pretty commonplace at Deutsche Bank in recent years.
Yet this latest one, by some measures the fifth since 2012, represents the most definitive attempt so far to reshape Germany’s biggest lender.
That is because it contains the most radical blood-letting to date at Deutsche’s investment banking arm – unwinding a bold plan, hatched three decades ago and before the Iron Curtain came down, to make the bank a global trading powerhouse.
Most attention, rightly, has been on the 18,000 jobs being cut by Deutsche worldwide. That is only part of the story, though, in what is a dramatic overhaul. The bank is pulling out of some entire activities, most notably equity sales and trading, while reducing activity in others.
For long-time observers of Deutsche in the City of London, where around 7,000 of its 8,000 employees work, this is very sad indeed.
The equity sales and trading business owned by Deutsche Bank in London traces its origins back to County NatWest, the securities arm of the old National Westminster Bank, which was set up in 1986 to capitalise on the opportunities created by the reforms known as “Big Bang”.
Subsequently acquired by the US lender Bankers Trust, which was bought by Deutsche in 1999, It has long been renowned as one of the City’s best and most considerate employers in an often brutal sector. Its offices on Winchester Street, just south of Liverpool Street station, are known not just for one of the City’s best canteens but also for an impressive art collection that seldom fails to dazzle visitors.
Those factors, however, also hint at the problems Deutsche has had in trying to crack investment banking.
A fancy art collection, a nice canteen and benevolence to the workers seldom point to a business focused on cost control. So it was with Deutsche.
The bank’s advance into investment banking was characterised by trying to hire the best people in the business, paying them the best salaries and then trying to build market share quickly.
Growing revenues, the top line, was deemed more important than growing the bottom line – profits – in the short term.
The expectation was that, over time, Deutsche’s market share would come to bear and that the profits would roll in. The sheer size of Deutsche’s balance sheet meant that, particularly after the financial crisis, the bank was able to withstand the need to rein in costs in these areas.
Deutsche managed, unlike some British and American rivals, to avoid having to be bailed out by taxpayers or being pushed into being rescued by its competitors. That meant that tough decisions were deferred. The dream of beating the Wall Street “bulge bracket” players like Morgan Stanley and JP Morgan survived the crisis in a way it did not at, say, Royal Bank of Scotland.
Indeed, with the appointment of investment banking chief Anshu Jain as co-chief executive in 2011, it almost seemed to many – particularly the toilers at Deutsche’s head office in Frankfurt – that the investment bankers had won control of the organisation.
An old saying in business is never let a good crisis go to waste. However, precisely because Deutsche did not encounter some of the existential threats its rivals did during the financial crisis, problems were stored for later.
America’s major banks, for example, were forced to recapitalise their balance sheets and offload non-performing loans relatively quickly. That in turn enabled the US economy to get back on its feet more quickly after the crisis.
The same thing did not happen in Europe at anything like the same pace which is one reason why, a decade on from the crisis, Europe’s economies are growing much more slowly.
Only now is Deutsche taking the action other rivals did a decade ago. Apart from discontinuing certain activities and cutting back on others, the most eye-catching aspect of today’s shake-up is the creation of a so-called “bad bank” into which some €74bn (£66.3bn) worth of toxic assets will be dumped.
To put that in context, Citi of the US, German rival WestLB and RBS all set up “bad banks” at the height of the crisis in 2008.
The following year saw Lloyds, UBS of Switzerland and Deutsche’s local rival Commerzbank do the same.
Only in September 2012 did Deutsche get around to setting up its own similar unit, called “non-core operations”, into which €135bn worth of assets were placed.
At the time, Deutsche’s management stressed this was not a “bad bank”, which it clearly was not. Its creation – along with three capital raisings totalling €26.7bn during the last eight years – was not enough to shore up Deutsche’s capital position.
Some of those capital raising exercises, particularly around 2016, caused a lot of consternation.
For a while it seemed as if John Cryan, the Briton who was appointed chief executive in 2015, was getting to grips with the numerous legacy issues the bank faced. But he was undone by management in-fighting and, some would say, was undermined by his rivals within the bank – many of whom, at executive level, harboured grudges against him for taking away their bonuses.
So it has fallen to his successor, Christian Sewing, to continue Mr Cryan’s work and step up the pace.
The big question is whether this restructuring will finally revive Deutsche’s fortunes.
There have to be doubts about that.
First, there is the question of execution. Mr Sewing will be relying on a workforce whose morale has been battered to implement the changes he wants making.
Secondly, and most crucially, is the issue of where, shorn of investment banking, the growth in revenues is going to come from. Mr Sewing’s aim is to restore Deutsche to being a domestically-focused bank concentrating on retail banking in Germany and on providing corporate banking services for German businesses both at home and around the world.
That, though, may not be enough to rebuild profits. For a start, interest rates are going to remain negative in the eurozone for the foreseeable future, crushing the profitability of lenders.
More crucially, German banks like Deutsche have even found themselves eclipsed by the likes of Italy’s UniCredit in their attempts to rebuild profitability because competition in the retail banking sector in Germany is absolutely cut-throat, with hundreds of small banks, notably regional Sparkassen, competing for business.
Thirdly, in common with a lot of UK lenders, Deutsche is refocusing on its domestic retail and corporate banking operations at a time when its IT systems are desperately in need of an upgrade. This is one of a number of similarities the bank has with RBS.
Another key question mark concerns an area Mr Sewing hopes will drive growth in coming years – asset management.
Deutsche has already partially floated DWS, its asset management business, but it is debatable whether this business is, in the jargon, sufficiently scalable to generate the kind of returns Mr Sewing is seeking. There were reports last year, denied, that Deutsche had held talks with UBS about merging their asset management divisions.
Perhaps the most intriguing question is what happens to Deutsche over the longer term.
A merger was considered earlier this year with Commerzbank, backed by the Merkel government, but was ultimately killed by opposition within Deutsche’s domestic rival.
But the bigger prize for Mr Sewing, if he genuinely can clean up this bank, would surely be a merger with another European player.
Mr Cryan was fond of pointing out that, unlike their peers in the US and China, Europe’s banks are comparative minnows with only HSBC and Banco Santander approaching any meaningful size.
That may partly be because, as with airlines, European governments like to have national champions. Yet a combination with, say, BNP Paribas of France will start to look more logical over time and especially if the tech companies begin take market share in traditional retail banking activities.
In the meantime, Deutsche’s rowing-back from investment banking activities, in common with similar moves from Swiss and Japanese lenders in recent years, means there is even less competition now to the “full service” global banks based on Wall Street.
Arguably, the only non-American operator providing any competition to them from now on will be Barclays, although some at HSBC and Credit Suisse would argue otherwise.
Deutsche’s misfortunes may yet provide them with an opportunity.