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Can Deutsche Measure Up? (Int'l Edition)

International -- Finance

CAN DEUTSCHE MEASURE UP? (int'l edition)

A laggard among Eurorivals, it's scrambling to revamp

From Rolf E. Breuer's office atop the Frankfurt headquarters of giant Deutsche Bank, you can survey the offices of just about every big lender in Germany, not to mention those of several other rivals. That's a handy perspective: Breuer, Deutsche Bank's CEO since last May, has been widely rumored to be looking to buy some of these very banks. But as Breuer talks about his strategy, you get the sense that he's not in a buying mood just yet. Indeed, he all but rules out a big deal like the $57.8 billion merger Swiss Bank Corp. engineered with Union Bank of Switzerland in December. "Our answer is to get our machine on the street and drive it at full horsepower," he says.

Breuer, 60, is test driving a new strategy that he hopes will rev up growth in the increasingly competitive world of Eurobanking. In late January, he announced a reorganization, including a $2.1 billion write-down for Asian loan losses and a wide-ranging restructuring of investment banking and other businesses. The goal: to slash bureaucracy, increase top managers' accountability, and boost Deutsche's pretax return on equity from about 17% to 25% by the year 2000. Analysts also expect Breuer to slash his workforce by as much as 9%--or 8,000 jobs--within three years. But is that enough? All of a sudden, even Europe's mightiest lenders are facing a tough new standard.SLOWPOKE. Deregulation and the arrival of European Monetary Union next year are putting huge pressure on laggards like Deutsche to boost profits. It's no longer enough to be No. 1 in your own backyard. Banks now are being judged against their Europewide competitors. And the competition is stiffening. Such Eurorivals as Credit Suisse, Swiss Bank, and France's Societe Generale have installed dynamic CEOs who are expanding aggressively with an eye toward the bottom line.

Breuer has looked like a slowpoke ever since the big Swiss merger in December. The newly created United Bank of Switzerland has $625 billion in assets, surpassing Deutsche's estimated $568 billion, and a market capitalization nearly twice Deutsche's $35 billion. Despite its massive asset base, Deutsche ranks a lowly sixth in market cap among European banks. Moreover, analysts doubt Breuer's reorganization will achieve 25% pretax returns. A source close to the bank says Breuer would have to close 500 of Deutsche's 2,400 domestic branches and cut 10,000 jobs to really cut into the bank's bureaucracy.

Still, Deutsche's stock has risen since Breuer's bombshell announcement, mainly because--despite Breuer's denials--investors see the restructuring as an interim step. Institutions from Germany's Commerzbank to America's J.P. Morgan & Co. are rumored to be takeover bait for Deutsche or a European rival. But Breuer says that even his avowed hope to do a big deal in France is now on hold because of opposition from the French government. "We are big enough," he says. "We're not looking for a major merger."

Instead, Breuer is simplifying Deutsche's convoluted structure by reorganizing it into five global lines of business: asset management, middle- market corporate banking, retail banking, back-office operations, and wholesale and investment banking. Swiss Bank similarly rearranged its businesses shortly before its deal with UBS.

The biggest departure, though, is Breuer's attack on his bureaucracy. He cut the bank's management board from 10 members to eight. He is shaking up a lower level board of operating executives and is effectively giving each of his business units a CEO responsible for achieving financial goals. The bank's structure "has to be lean, direct, and responsive," Breuer says. "We have to identify the people who do a fabulous deal and reward them."

Still, Breuer tacitly acknowledges that Deutsche's biggest diversification of the last decade--investment banking--isn't working. The bank has struggled since acquiring Britain's Morgan Grenfell in 1989. Deutsche Morgan Grenfell spent huge sums in the last few years to hire big-name investment bankers in a bid to keep up with Goldman Sachs; Morgan Stanley, Dean Witter, Discover; and J.P. Morgan. The lavish compensation never produced the successes Deutsche expected. In 1997, DMG lost $55 million in investment banking, global fixed income, and global equities, estimates one banker. Now, Breuer is reining in the unit. He's combining it with corporate lending and will probably drop the venerable Morgan Grenfell name for many businesses. The idea is to cut costs and gain focus, especially in Germany, where Deutsche corporate bankers often tangled with DMG investment bankers over business.DEFECTIONS. Breuer is pinning his investment banking hopes on two Frankfurt-based members of Deutsche's board: ex-Credit Suisse executive Josef Ackermann and Deutsche veteran Ronaldo H. Schmitz. They have been joined by Bill Harrison, former head of Barclays Bank PLC's defunct investment bank, to help Deutsche shore up M&A. But the revamp is causing turmoil: A group of DMG bankers in Frankfurt just defected to Merrill Lynch & Co., and more staff losses may be in the offing.

While Breuer attempts to get investment banking under control, he is also under the gun to boost profits from traditional lending. Deutsche has been paring its retail banking network in Germany for five years, but further cost-cutting is planned. Corporate lending also could use a shake-up, says J.P. Morgan analyst Stuart Graham.

Changes such as Breuer is seeking won't come easily. "German banks have lived for many years in a relatively stable environment," says Antonio Borges, head of INSEAD, the business school in Fontainebleau, France. "Now they have to adapt very quickly to a new European environment." The question now is whether Breuer has taken that lesson adequately to heart.By Thane Peterson in Frankfurt with Stanley Reed in LondonReturn to top

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