Has Deutsche Bank Lost Its Way?

Having failed to find a merger partner, Ackermann plans a radical makeover. Investors are skeptical

For Deutsche Bank (DB ) Chief Executive Josef Ackermann, 2004 has turned out to be a forgettable year. Three attempts to pull off a big merger -- with Citigroup (C ), Germany's Postbank, and Credit Suisse First Boston (CSR ) -- failed. The bank's stock is down 6.9%, compared with a 7.9% average gain for other European banks -- and bigger gains for international competitors like HSBC. And on Oct. 28 respected board member Ulrich Cartellieri resigned, saying he could no longer support Ackermann's leadership. To cap it off, Ackermann was embroiled in a criminal trial from January to July on charges of aggravated breach of shareholder trust when he was a board member of Mannesmann (VOD ) and it was taken over by Vodafone Group PLC (VOC ). He was acquitted, but the case may be retried. During those seven months internal wars at the bank raged. And Deutsche drifted. "There is no vision and no strategy," says one former Deutsche banker.

Can Ackermann steer Deutsche out of its rut? He is determined to keep trying. On Sept. 21 he announced a radical reorganization of the bank, redoubling his effort to clinch the 25% return on equity he has targeted for 2005 -- a target that at this point looks like a long shot. Details of the overhaul will be released with fourth-quarter results, but analysts say the 56-year-old, Swiss-born CEO will have to deliver between $900 million and $1.3 billion in cost cuts in 2005 to reach his goal. Insiders believe the drive to bolster Deutsche's bottom line is likely to lead to a slashing of 6,000 jobs, or 10% of global staff. The moves are part of a renewed drive to make Deutsche more attractive for a big cross-border deal, say Frankfurt and London bankers. Insiders say Ackermann has been talking with a slew of potential merger partners, including Lloyds TSB, ING Group, and Barclays. "If [Deutsche] improves profitability, the market will reward them," says Vasco Moreno, bank analyst at Keefe Bruyette & Woods Ltd. in London.

Despite his travails, Ackermann has made admirable headway boosting Deutsche Bank's profits. Analysts expect net profit to double this year, to $3.5 billion on revenues of $26 billion. Deutsche has sold off $450 million in portfolio holdings this year, reduced loan losses, and solidified gains in investment banking, which contributed 71% of the bank's net profit in 2003. Deutsche ranks No. 6 in announced mergers and acquisitions for 2004 worldwide (No. 10 in the U.S.) and is No. 7 in global debt and equity underwriting, according to Thomson Financial (TOC ). Return on equity has jumped since Ackermann took over, from just 1.1% in 2002 to 9% in 2003, and the consensus forecast is for 19% for 2004. "On the fixed-income side, they are top players. Deutsche Bank has a very impressive team," says Didier Cossin, professor of finance at the International Institute for Management Development in Lausanne.


But Deutsche's aim of standing shoulder-to-shoulder with the world's top five investment banks remains elusive. Hampered by a weak presence in the U.S., the bank ranks No. 21 worldwide in market capitalization among banks. Its market cap of $44 billion is a fraction of Citigroup's and other rivals'. Critics charge that in his pursuit of a high global profile, Ackermann has put too much emphasis on investment banking, to the detriment of Deutsche's home market. And instead of healing the rift between its London-based investment bankers and German-based staff, Ackermann has fueled internal infighting, critics say. "You can only build a strong international business off a strong domestic foundation," says an adviser to Cartellieri. He also cites a "dangerous imbalance" in investment banking, with most of the business in high-risk debt issuance and trading activities. The bank, he adds, remains "weak" in safer areas such as equity issuance, advisory, and fund management. Deutsche says it has a handle on its risk. Deutsche's poorly performing asset-management business suffered an outflow of $15 billion over the past three months as the bank lost top institutional clients, including Prudential.

Ackermann insists he is not neglecting his home base. Indeed, in September he created a new German Management Committee designed to bolster domestic corporate business. Some see it as a palliative. Sources close to Ackermann say his strategic aim has always been to bolster the steady income provided by the retail, corporate, and asset-management businesses, but that gaining credibility in investment banking took priority in his first two years on the job. Now that those credentials are in place, management is able to focus on fixing Deutsche's German business. "We want to improve our cooperation with our customers significantly," says Jürgen Fitschen, chairman of the new German Management Committee.

Deutsche Bank intentionally trimmed the ranks of its German clients over the past few years, including giant auto maker Volkswagen, since it was unwilling to continue extending loans at below-market rates -- a postwar practice that helped German industry back to its feet but that simply serves to undermine bank profits today. "We are not the state bank of Germany," says the source close to Ackermann. "And we are not the EasyJet of the banking industry. The key is that we are making money in Germany." Deutsche's retail operations are expected to earn a profit of more than $1 billion this year. Ackermann also has staunchly resisted political pressure from Chancellor Gerhard Schröder and some of his own board members to create a national champion by taking over weak domestic rivals such as Commerzbank -- which announced on Nov. 8 that it was abolishing most of its investment banking operations and cutting 900 staff members.

Ackermann may well be able to rev up the bank's German operations -- its name is still a powerful symbol of Germany Inc. But can the bank ever make the kind of global imprint that Ackermann and his predecessors have been pursuing for 20 years? Analysts say it's still a long haul. Big-league banks such as Citi and J.P. Morgan Chase have a strong advantage in wooing the biggest global companies, including German ones like DaimlerChrysler (DCX ), since they have the resources to extend more credit and do more syndicated loans. "The risk is that Deutsche gets aced out of the big corporate clients even in its backyard," says a rival banker.

But Ackermann isn't giving up the quest. He intends to continue hunting for consumer banking franchises in Asia and other European countries, since consolidation in Germany remains plagued by an aversion among political and labor leaders to serious restructuring. While rival German bankers say Deutsche is running out of time to make a cross-border match, those close to Ackermann say he is in no hurry. That could be so. But Ackermann's vision for catapulting Deutsche Bank into the global top tier remains a puzzle with missing pieces.

By Gail Edmondson in Frankfurt

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