New Deutsche Bank CEO Means Krause Versus Weber Vying With Jain
Stefan Krause, chief financial officer of Deutsche Bank AG, poses in this undated photo released to the press on May 3, 2011. Source: Deutsche Bank AG via Bloomberg
Stefan Krause, who left the auto industry after a 20-year career to join Deutsche Bank AG (DBK) as chief financial officer, had a memorable introduction to the banking world in April 2008. On his first day, Germany’s biggest lender announced a record loss on loans and asset-backed securities.
“They said, ‘Stefan, welcome, we have to write down 2.5 billion euros,’” says Krause, a boyish-looking 48-year-old whose office overlooks the Frankfurt skyline. Ten months later, the bank posted a record 3.8 billion euro ($5.4 billion) loss -- its first full-year deficit since World War II, Bloomberg Markets magazine reports in its June issue.
By then, Krause was already helping Chief Executive Officer Josef Ackermann chart the bank’s route out of the crisis. Within a year, he had cut assets by about a third and engineered the takeover of retail lender Deutsche Postbank AG. (DPB) In 2009, Deutsche Bank was back in the black -- with a profit of 5 billion euros. In October 2010, Krause helped pull off a record 10.2 billion euros capital increase to complete the Postbank takeover and boost reserves.
These accomplishments have boosted Krause’s chances of succeeding Ackermann, 63, who since taking over in 2002 has built Deutsche Bank into Europe’s largest investment bank based on revenue.
On Shortlist
Though Ackermann’s contract runs until the spring of 2013, the Swiss native may leave earlier and could designate a successor by the end of this year, according to people familiar with the matter, who say Krause is on the shortlist of internal candidates along with Anshu Jain, 48, head of the corporate and investment bank, and Chief Risk Officer Hugo Banziger, 55, both of whom have been with the bank for about 15 years.
The succession race has intensified with Axel Weber, 54, who stepped down as Bundesbank president in April, joining the mix as a potential successor or co-CEO. Jain oversees the business that generated 73 percent of the bank’s revenue in 2010, something analysts say makes him the front-runner.
Banziger’s risk management is credited with helping the bank avoid taking state aid, making him the second favorite, analysts say. One of the bank’s goals is to reduce its dependence on investment banking, a shift in which Krause plays a leading role. “You should definitely have Krause on your list,” says Olaf Kayser, an analyst at Landesbank Baden- Wuerttemberg in Mainz, Germany. “Krause’s standing in the bank has risen quickly. He’s shown an ability to grasp the complexities of the banking world despite his automotive background.”
Lawsuit Fallout
Whoever succeeds Ackermann will have to deal with continued fallout from the financial crisis. On Tuesday, the U.S. government sued the bank for more than $1 billion, claiming it “repeatedly lied” so that thousands of risky mortgages qualified for a government insurance program.
A bank spokeswoman, Renee Calabro, told Bloomberg News by email that the bank believes the lawsuit’s claims are “unreasonable and unfair, and we intend to defend against the action vigorously.”
The suit also names MortgageIT, a firm Deutsche bank bought in 2007 and shuttered the following year. No individual bank executives are named in the suit.
Car Guy
At Deutsche Bank, Krause still shows signs of being a car guy. At the start, he peppered his speech with automotive analogies, a habit he’s discarded. His office is decorated with seven model cars, including a Corvette from 1962 -- his birth year -- a Roy Lichtenstein BMW art car and a BMW hydrogen- powered vehicle. Krause, whose hobbies include kite surfing, drove a real version of the hydrogen car, which he wasn’t allowed to park in enclosed areas because it lacks government safety approval.
Asked about his prospects as Ackermann’s successor, Krause demurs. “Joe’s contract runs until 2013, so this topic is being raised way too early,” he says. Ackermann told German newspaper Welt am Sonntag in April that his replacement doesn’t have to come from within the company nor need years of banking experience, signaling his preference for Weber.
Ackermann has given Krause, who was born in Colombia of German parents, added authority by having him oversee the internal strategy department, which evaluates acquisitions and investments, a job Ackermann previously handled himself.
Casino Investment
Krause is also charged with salvaging the $3.9 billion Cosmopolitan Resort & Casino in Las Vegas, which the bank foreclosed on in 2008, and U.S. and Canadian port operator Maher Terminals, which the bank values at $2.5 billion.
Krause’s next task is to convince investors that Deutsche Bank can keep boosting its profits amid new regulations that require financial institutions to have more capital and to sell some derivatives via clearinghouses. Deutsche Bank will have to set aside more reserves for risky assets under new rules proposed by the Financial Stability Board, a body set up in 2009 by the Group of 20 nations that includes central bankers and regulators.
Under the rules, Deutsche Bank’s core capital ratio -- a buffer against possible losses -- may fall to 6.1 percent in 2012 from 8.7 percent as of Dec. 31, according to Christopher Wheeler, an analyst at Italy’s Mediobanca SpA. That would be the second-lowest level among 29 competitors when calculated to reflect all of the regulatory changes, Wheeler says.
‘Low Capital’
By contrast, Swiss bank UBS AG (UBSN) would have a ratio of 11.7 percent, Mediobanca estimates. “Deutsche Bank’s low capital is definitely a challenge,” Wheeler says.
Deutsche Bank also relies more than competitors on borrowed funds, or leverage, to increase returns. Its assets amounted to 51 times shareholders’ equity as of Sept. 30, up from 48 times at the end of 2006, according to data compiled by Bloomberg and requirements set by the International Accounting Standards Board. Only Brussels-based Dexia SA had higher leverage among Europe’s 15 biggest publicly traded banks.
Deutsche Bank is still trying to absorb three companies it bought during the past few years: Postbank, which it gained control of in November in a transaction valued at 6.4 billion euros; Sal. Oppenheim Group, a wealth management firm that the bank acquired in March 2010 for 1 billion euros; and ABN Amro Holding NV’s commercial-banking operations in the Netherlands, which the bank agreed to buy in October 2009.
Earnings Rise
“Now we have to make this all work in the confines of the new system,” Krause says.
The acquisitions have helped reduce the dependence on investment banking by bolstering the relatively stable businesses of consumer lending, asset and wealth management and transaction banking. These units accounted for about 29 percent of pretax profit in 2009. Ackermann aims to boost that share to more than 40 percent by 2013.
Deutsche Bank on April 28 reported a 17 percent increase in first-quarter profit to 2.1 billion euros, exceeding analyst estimates on record earnings at the consumer-banking and asset- management units.
Investors remain skeptical, pushing the bank’s shares down 18 percent in German trading during the 12 months ended on April 11, to 42.65 euros, which places the company’s market value at about 40 billion euros. That compares with a 6 percent decline in the Bloomberg Europe Banks and Financial Services Index of 48 stocks in the same period.
Ambitious Target
Deutsche Bank wants to increase pretax operating profit to 10 billion euros in 2011 from 2010’s 7 billion euros, helped by gains in investment banking and consumer lending and at units in Asia, according to company reports.
The German lender may report 8.3 billion euros in pretax profit this year, according to 22 analysts surveyed by Bloomberg as of April 18.
“The 10 billion-euro target is very ambitious,” says Peter Braendle, who helps manage about 60 billion Swiss francs ($67 billion) at Swisscanto Asset Management AG in Zurich. “Investment banking remains very volatile and risky.”
If Ackermann achieves the earnings target, it would set the stage for an exit at the annual shareholders meeting in May 2012, says Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets.
12-Month Timeline
“I think Deutsche Bank will probably name a successor in the next 12 months because it wants to avoid a repeat of the succession crisis we saw the last time around,” Becker says. The bank’s supervisory board failed to agree on a replacement when Ackermann was planning to step down in 2009. Instead, it extended his contract, breaking the deadlock.
While Ackermann is liked by everyone, there isn’t the same agreement on his potential successor, says Christian Hamann, an analyst at Hamburger Sparkasse. “That explains why co-CEOs are being discussed as a potential solution to make everyone happy,” Hamann says. “Possible combinations include Jain with Weber or Krause or Banziger.”
Any successor will have to balance the bank’s two roles: On one hand, it’s a global investment bank that competes with the likes of Goldman Sachs Group Inc. (GS) and that gets about three quarters of its revenue outside its home market; on the other hand, the 141-year-old institution is Germany’s largest bank, with ties to small and large business.
Advising Merkel
Deutsche Bank’s CEO is traditionally a key adviser to the government. Ackermann counseled Chancellor Angela Merkel on the rescue of property lender Hypo Real Estate Holding AG in 2008 as well as on the sovereign-debt crisis last year.
The bank’s domestic importance makes some analysts question whether the Indian-born Jain, who joined from Merrill Lynch & Co. and doesn’t speak fluent German, will be chosen to succeed Ackermann. “He’d be a shoo-in if not for political reasons,” says Piers Brown, a London-based analyst at Evolution Securities Ltd. The bank’s supervisory board, which is equally divided between shareholder and labor representatives, will choose the successor.
Krause’s background -- and his contacts throughout German industry, honed while he was at Bayerische Motoren Werke AG -- may boost his attractiveness as a candidate.
The child of German parents whose father imported Volkswagens to Colombia, Krause grew up on a farm 30 kilometers (19 miles) outside of Bogota, where he learned to ride horses and brand cows.
Job in Ecuador
Krause got the equivalent of a Master in Business Administration at the University of Wuerzburg in Germany in 1986. He returned to South America to work in Ecuador for his father’s business designing prefabricated homes and went back to Germany after the venture failed. In 1987, he joined the finance department at the engineering unit of Munich-based BMW, where he got a glimpse of top-secret concept cars.
Krause moved to the U.S. in 1993 to work for BMW’s financial services division, becoming its general manager in 1997. After a stint as head of sales in Europe, he was named, at the age of 39, BMW’s chief financial officer in 2002, making him the youngest member ever of the carmaker’s management board.
Krause was a candidate to succeed CEO Helmut Panke, who left the post in 2006, but lost to production chief Norbert Reithofer. Krause departed in 2008. Clemens Boersig, chairman of Deutsche Bank’s supervisory board, who knew Krause from a business administration association, approached him about succeeding CFO Anthony Di Iorio when he retired.
Ties to German Business
“Stefan had market experience and financial experience at BMW,” Di Iorio says. “And he had knowledge of and a relationship to German business. That was a dimension I couldn’t provide.”
While Deutsche Bank wrote down bad loans and asset-backed securities during the financial crisis, it didn’t seek government money, unlike either Commerzbank AG, Germany’s second-biggest bank, or UBS. Still, the German firm did benefit indirectly from actions by governments and central banks to stabilize markets.
Deutsche Bank tapped the U.S. Federal Reserve for as much as $55.2 billion on Nov. 13, 2008, according to data compiled by Bloomberg and Fed documents released in March in response to a Freedom of Information Act request by Bloomberg News. The bank also received $11.8 billion from American International Group Inc. (AIG), courtesy of a U.S. government bailout that covered the insurer’s obligations on its credit-default swaps.
“We would have survived the financial crisis without government intervention,” Krause says. “We lost our P&L in one quarter, but we still had capital.”
Krause is aiming to make sure the bank is ready to withstand any future crises. “The banking world has received a completely new set of rules,” he says. “Finding a balance within these new restrictions is the immediate next challenge.” If he handles it well, Krause could wind up in the driver’s seat at Deutsche Bank after all.
To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net
To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net
Rate this Page