Deutsche Bank Tackles Ackermann Legacy in Strategy Revamp

Deutsche Bank Tackles Ackermann Legacy in Strategy Overhaul
A pedestrian passes a Deutsche Bank AG branch in Frankfurt. Photographer: Hannelore Foerster/Bloomberg

Deutsche Bank AG co-Chief Executive Officers Anshu Jain and Juergen Fitschen, less than four months after taking over from Josef Ackermann, may be preparing the largest revamp at Europe’s biggest bank in eight years.

The leaders, scheduled to present their strategy for the Frankfurt-based lender on Sept. 11, are poised to explain how Deutsche Bank plans to increase capital without tapping shareholders, overcome interbank lending probes and cut costs by 3 billion euros ($3.8 billion) as revenues slump.

The co-CEOs join peers from UBS AG to Nomura Holdings Inc. in revamping their business as stricter capital rules make some operations unprofitable and Europe’s sovereign-debt crisis drags on. Their task is complicated by legal probes and a compensation system that’s losing credibility amid bank bailouts and diminished profits.

“This will be the biggest overhaul since 2004,” said Christopher Wheeler, a Mediobanca SpA analyst in London with the equivalent of a sell rating on the shares. “The risks are many and varied.”

Margin pressure and higher capital requirements have become “the new normal” for Europe’s banks as the crisis curbs client activity and competition increases, Fitschen, 64, said at a Frankfurt conference last week.

‘Tougher Times’

Fitschen distanced himself from the 25 percent return-on-equity target that helped define Ackermann’s tenure as CEO by saying “banking industry experts think that returns of 14 percent to 15 percent would be realistic.” Ackermann had already backed away from the goal in February.

Ackermann, in the reorganization announced in 2004, changed the management team and announced the profitability target, which earned him praise from investors and criticism from some German politicians for excessive risk-taking. Fitschen said banks do need ROE goals to remain attractive for investors and attract funds.

“They need to put the comments about lower ROE expectations in context,” said Boris Boehm, who helps manage about 1.1 billion euros, including Deutsche Bank shares, at Aramea Asset Management in Hamburg. “This may have been an opportunistic move to close off a flank from critics of banks or it may be based on the assumption that the sector will face tougher times amid the sovereign-debt crisis.”

Deutsche Bank officials declined to comment on strategy before tomorrow’s press conference.

Deutsche Bank’s pretax return on average active equity, the figure it uses to measure profitability, fell to 6.8 percent in the second quarter from 13.8 percent a year before.

Eliminating Jobs

To help reverse that slide, Deutsche Bank will eliminate as many as 1,900 jobs and reduce costs by 3 billion euros from the level in the first half of this year, the bank said on July 31. The job cuts, mostly outside Germany, will include 1,500 at the investment bank and support areas. The company forecast “substantial costs” to achieve the savings.

Credit Suisse Group AG analysts led by Amit Goel in London estimate that the charges may be 1.5 billion euros and that the plan will be executed by 2014. The “risks are that this is materially higher and that the reduction takes longer than we model,” they wrote in a note today. The analysts have a “neutral” recommendation on Deutsche Bank shares.

This round of firings, which amounts to almost 2 percent of the bank’s staff, is the largest since February 2005, when the company announced plans to eliminate 3,280 positions to boost profitability after Ackermann set his target.

Reviewing Compensation

“There’s a lot at stake,” Konrad Becker, a bank analyst with Merck Finck & Co. in Munich, said by phone. “We’re talking about the whole strategy of the bank and not only about profit targets or new products.”

The bank has begun eliminating positions in Asia, cutting about 15 equities posts in Tokyo and preparing for the dismissal of 30 more people in equity research, sales and trading there this week, according to people with knowledge of the matter. In total, 85 Deutsche Bank employees are set to lose their jobs at the Japan and Hong Kong equities units, the people said.

“They might announce even more on Sept. 11,” Mediobanca’s Wheeler said.

The bank is also preparing to revamp pay, Jain, 49, said in July. He and Fitschen are reviewing the “absolute level of compensation” and the “relative balance between rewards for shareholders and those for employees,” Jain said. The bank introduced bonus rules at the start of the year allowing it to claw back stock awarded to workers by former employers.

Capital Needs

Jain and Fitschen began putting their imprint on senior management earlier this year, elevating Stuart Lewis, 46, Stephan Leithner 46, and Henry Ritchotte, 48, to the management board. Chief Risk Officer Hugo Banziger, 56, a rival candidate to replace Ackermann, and Chief Operating Officer Hermann-Josef Lamberti, 56, left at the end of May.

Jain also pledged on a July 31 call with analysts to use “all the capital levers at our disposal” before tapping investors for equity. The bank is reducing risk-weighted assets to meet capital goals and said it can adjust compensation or the dividend and sell assets if necessary.

Global regulators are forcing banks to increase capital buffers to prevent a repeat of the taxpayer-funded bailouts that followed the collapse of Lehman Brothers Holdings Inc. Deutsche Bank, which weathered the crisis without direct government aid, may say how it plans to meet the requirements tomorrow.

Catching Peers

“What the market’s really interested in is how they will catch up with their peer group” on capital, said Kinner Lakhani, an analyst at Citigroup Inc. in London with a neutral rating on the company’s shares.

Deutsche Bank is the least capitalized of Europe’s four biggest investment banks, trailing Barclays Plc of London and Zurich-based Credit Suisse and UBS, data compiled by Bloomberg Industries show. Its core Tier 1 capital ratio stood at 10.2 percent at the end of June. Tougher rules, known as Basel III, begin taking effect at the start of 2013, calling for lenders to hold more reserves against riskier assets.

Boehm at Aramea said he would oppose a share sale to boost Deutsche Bank’s capital. “Every protection against dilution is positive for shareholders,” he said.

Deutsche Bank rose 1.1 percent in Frankfurt trading as of 10:03 a.m. local time, extending the stock’s gain this year to 7.7 percent as European Central Bank President Mario Draghi’s plan to support bond markets in Spain and Italy buoyed financial shares across the region. The increase compares with a 6.4 percent advance in the 28-company Euro Stoxx Bank Index.

Libor Probe

The effort by Jain and Fitschen to move the bank forward following the departure of Ackermann, 64, may be complicated by legal matters dating to his tenure.

Deutsche Bank said in March it had become the target of probes into its role in alleged manipulation of the London interbank offered rate. The firm is among four European banks being investigated by U.S. authorities for alleged violations involving oil trading and Iran, an attorney with knowledge of the matter said last month on condition of anonymity.

These come atop legal disputes tied to its expansion into mortgage-backed securities during the U.S. housing boom as well as decade-long court cases with the now deceased Leo Kirch’s media group. Deutsche Bank raised its estimate of potential risks that it had not provisioned for to 2.5 billion euros from 2.1 billion euros at the end of June from three months earlier. In its second-quarter report, Deutsche Bank said it faces “significant litigation risk.”

Barclays’s record 290 million-pound fine in June for manipulating Libor, which triggered the resignation of three top executives, including CEO Robert Diamond, reverberated across the financial industry. The U.K. lender admitted to attempting to rig rates to benefit its own derivatives trades and to appear healthier during the crisis.

Potential Costs

Deutsche Bank, among at least a dozen firms under international investigation in the matter, reiterated in July that it’s co-operating with regulators and said an internal investigation has so far cleared current and former management board members of wrongdoing. It has “taken action” against “a limited number” of employees, who “engaged in conduct that falls short of the bank’s standards,” it said in July.

Legal expenses stemming from probes into manipulation of Libor could be as high as $1.04 billion for Deutsche Bank, according to estimates published by Morgan Stanley analysts Betsy Graseck and Huw van Steenis in a July note.

Libor, determined by 18 banks’ daily estimates of how much it would cost them to borrow from one another for different time frames and in different currencies, is the benchmark for more than $360 trillion of securities worldwide.

Lost Trust

As scrutiny of banks’ behavior intensifies, Fitschen said Deutsche Bank must take the lead in restoring public trust in the industry.

“All bankers have to ask themselves how they can develop a business model that’s sustainable in the long term and at the same time accepted by the public,” he said last week. “People’s confidence in banks has been lost. We have to accept that and we have to regain the trust by showing that we have drawn the appropriate consequences and that we will continue to do more.”

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