Deutsche Bank AG, continental Europe’s biggest bank, is asking investors to replace three non-bankers supervising its executives with finance and legal experts after litigation-related costs eroded profit last year.
Shareholders meeting in Frankfurt tomorrow will vote on naming John Cryan, president for Europe at Singapore investment firm Temasek Holdings Pte, Dina Dublon, former chief financial officer at JPMorgan Chase & Co., and Georg Thoma, a partner at law firm Shearman & Sterling LLP, to its supervisory board.
Deutsche Bank co-Chief Executive Officers Anshu Jain and Juergen Fitschen are grappling with legal entanglements that include probes into the rigging of interbank borrowing rates, U.S. lawsuits tied to mortgage-backed bonds and a Milan fraud conviction. Chairman Paul Achleitner, in an April statement, described the board nominees as experts in financial matters, market risk and legal issues.
“They’re up to their necks in litigation -- it’s a real battle,” Christopher Wheeler, an analyst with Mediobanca SpA, said in a phone interview from London. “The company won’t escape litigation in the future, given the scale of its business, but they want to try and limit any new developments while they deal with the legacy issues.”
Deutsche Bank’s expenses, excluding compensation and some other costs, jumped 19 percent to 15 billion euros last year on higher legal provisions and funds for overhauling its business. Those costs contributed to a 2.53 billion-euro fourth-quarter loss, the biggest since the three months that followed the collapse of Lehman Brothers Holdings Inc. in 2008.
Deutsche Bank raised its litigation reserves to 2.4 billion euros by the end of March from about 800 million euros six months earlier as it set aside money for regulatory investigations and U.S. mortgage lawsuits, it said in a presentation posted on its website last month.
The German bank’s shareholders are paying for alleged misconduct by some of the company’s employees, says Helmut Hipper, a fund manager at Union Investment GmbH in Frankfurt.
“While they generated great returns at the time, the burdens came later,” says Hipper, whose firm holds about one percent of Deutsche Bank’s shares. “That is a matter of concern. There’s a reputation risk and it costs money.”
Achleitner, the 56-year-old chairman, wants to set up a compliance committee on the board to head off future legal issues, Der Spiegel reported on May 17, without citing anyone. Deutsche Bank spokesman Christian Streckert declined to comment on the report.
Such efforts need to be complemented by actions by executives, said Mediobanca’s Wheeler.
“Starting a committee on the supervisory board is more form over substance,” said the London-based analyst, who has a neutral recommendation on the stock. “You’ve really got to have people on the ground to make a difference.”
Deutsche Bank sought to improve corporate governance last year by splitting oversight of risk and legal affairs between Stuart Lewis and Stephan Leithner.
It also hired Daniela Weber-Rey, 55, as chief governance officer and deputy global head of compliance from law firm Clifford Chance LLP. She starts next month.
“The past has to be dealt with,” Achleitner said in an interview with Frankfurter Allgemeine Sonntagszeitung published May 19. “But don’t forget, almost everything we’re talking about now dates back to before 2009. We’ll deal with this, but you can’t do that from one day to the next.”
Cryan, the former CFO of UBS, has spent more than two decades in finance. Dublon joined Chemical Bank, which eventually became JPMorgan, as a trainee on the trading floor in 1981 before retiring from the firm in 2004. Thoma at Shearman & Sterling worked for Depfa Bank Plc on its 5.7 billion-euro acquisition by Hypo Real Estate Holding AG.
Cryan, Dublon and Thoma didn’t answer e-mails from Bloomberg News seeking comment on what priorities they will set if they join the supervisory board.
Regulators from Canada to Switzerland are investigating whether more than a dozen banks, including Deutsche Bank, colluded to rig lending rates. Barclays Plc, UBS AG and Edinburgh-based Royal Bank of Scotland Group Plc have paid a total of about $2.5 billion in penalties after admitting wrongdoing.
Deutsche Bank has suspended or fired at least seven people over alleged inappropriate behavior related to interbank rate submissions, people familiar with the matter said in February. That’s fewer employees than London-based Barclays and UBS of Zurich each disciplined or dismissed, company and regulatory filings show.
Neither Deutsche Bank’s internal rates probe nor that of Bafin, its main regulator, has yet found evidence that current or former management board members engaged in wrongdoing, officials at the bank and Bonn-based Bafin have said. Bafin is continuing its investigation after informing the German Finance Ministry of preliminary findings at the end of March.
Deutsche Bank’s Streckert declined to comment on the probe.
The bank’s legal woes aren’t limited to interbank rate-rigging and will continue to weigh on the stock, Kian Abouhossein, an analyst with JPMorgan, wrote in a May 21 report. He lowered his rating on Deutsche Bank to neutral from overweight.
The stock fell 2.3 percent to 36.66 euros in Frankfurt trading yesterday, paring its gain this year to 11 percent. That compares with a 12 percent increase in the 40-company Bloomberg Europe Banks and Financial Services Index.
The company is a defendant in several civil suits as an issuer or underwriter of U.S. residential mortgage-backed securities. Deutsche Bank had $5.3 billion of outstanding mortgage repurchase demands at the end of March against which it held about $500 million of reserves, it said in the April 29 presentation.
A Munich court found Deutsche Bank and former CEO Rolf Breuer partially liable in December for statements he made in 2002, before the Kirch group of German media companies filed for bankruptcy. The court had previously said that Deutsche Bank may have to pay the heirs of now-deceased entrepreneur Leo Kirch as much as 1.5 billion euros in a case tied to the collapse.
In Milan, a judge convicted the bank and three other firms in December of fraud in the sale of derivatives to hedge the city’s interest-rate risk. The bank has said it plans to appeal.
In Germany, corporate law requires listed companies to be headed by a two-tier system with a management board responsible for day-to-day operations and a supervisory board, whose main task is to oversee the management board and appoint its members.
If elected, Cryan, 52, and Thoma, 68, will replace Karl-Gerhard Eick, previously CFO of phone company Deutsche Telekom AG, and Werner Wenning, the former chief executive officer of drug and chemical maker Bayer AG. Dublon will stand to replace Tilman Todenhoefer, ex-deputy CEO of auto-parts maker Robert Bosch GmbH, at the beginning of November, according to the bank.
Wenning, 66, helped pick the new board members, Achleitner said in an April 16 statement. Eick made “an outstanding contribution” as audit committee chairman while Todenhoefer, 69, helped take “key decisions” as a member of the group that makes recommendations on management pay, Achleitner said.
The terms of all three departing board members were due to expire this year, according to the bank’s annual report.
Half of the 20-member supervisory board represents employees, while the other half is elected by shareholders. The chairman has two votes in case of a draw.