Cryan’s Next Fix: Deutsche Bank’s $800 Billion Fund Businessby and
Deutsche Bank’s Moreau is reviewing options for the business
Clients have pulled money for five straight quarters
John Cryan has spent the past 18 months downsizing Deutsche Bank AG’s investment bank, cutting thousands of jobs, and settling billion-dollar legal disputes.
His next task may not be any easier: Reviving the bank’s $800 billion asset manager.
The unit is key as Deutsche Bank seeks to boost revenue, and it could play a role in raising capital that’s been eroded by misconduct charges. Chief Executive Officer Cryan has ruled out selling the business to raise money, while leaving the door open for a partial public offering. But the division, led since October by Nicolas Moreau after a predecessor left within months, has been roiled by concern about the parent company’s finances, executive turnover and five straight quarters of client redemptions, and has fallen far behind competitors such as BlackRock Inc. and Amundi SA.
“In the past, Deutsche Bank neglected the asset-management business a bit as it was focused on investment banking,” said Tomasz Grzelak, an analyst with Baader Helvea in Zurich. “The current management is paying the price for that.”
Moreau, a 51-year-old Frenchman who spent about 25 years at Paris-based insurer Axa SA, is conducting a review of the business. He has told investors he would support selling a stake through an initial public offering, according to two people familiar with the matter. The bank is weighing a partial IPO of the unit in Luxembourg, Reuters reported Tuesday, citing sources.
At least one of the bank’s top three shareholders would back a partial listing if it’s key to growing the business, said one person, asking not to be identified because the talks are private.
Citigroup Inc. analysts led by Andrew Coombs estimated late last year that the division was worth at least 8 billion euros ($8.6 billion). An IPO of a 25 percent stake would boost the bank’s common equity tier 1 ratio by 10 to 50 basis points, Coombs wrote in a research note. A basis point is one-hundredth of 1 percent.
“Floating a minority stake in Deutsche AM would not solve Deutsche Bank’s capital problems,” said Boris Boehm, who helps manage more than 2 billion euros, including Deutsche Bank shares, at Aramea Asset Management in Hamburg. "A fully fledged capital increase for the bank as a whole would be a much better option.”
Deutsche Bank has struggled for years to enact a lasting strategy for asset management. It tried to sell much of the business in 2012, then stopped when it couldn’t get enough money. The process unnerved employees and clients, leading some to pull their money.
The bank reversed course, betting asset management can be a profitable alternative to capital-intensive debt trading. It merged the unit with wealth management, only to separate the businesses again in 2015, partly for regulatory reasons. Quintin Price, a former BlackRock executive who was Cryan’s most senior hire when joining at the start of 2016 to run asset management, soon fell ill and left, leading to more uncertainty and departures.
Investors pulled 29 billion euros in the first nine months of last year, leaving the unit with 715 billion euros under management, or about $800 billion, as of Sept. 30. The fourth quarter is likely to be negative as well, according to a person familiar with the matter. Amundi, by contrast, had 39.1 billion euros of inflows in the nine-month period, and has attracted new money for at least seven consecutive quarters.
Deutsche Bank’s Thorsten Michalik, who heads coverage for Europe, the Middle East, Africa and Asia-Pacific at the unit, said by phone that most of last year’s outflows were from low-margin funds, while higher-margin products drew inflows.
“The year is off to a good start with positive inflows into a lot of products,” he said of 2017, without giving details.
Moreau, who joined Deutsche Bank in October, said in an interview with German newspaper Welt am Sonntag that his immediate priority is stopping the redemptions. Longer-term, he said he hopes to lift Deutsche Bank’s asset management business into the top 10 globally. The unit ranked 17th at the end of 2015, according to Investment & Pensions Europe.
The former insurance executive spent his early years at Axa in investment management, including a stint as head of Axa Rosenberg, a quantitative manager acquired in 1998. He was named CEO of Axa Investment Managers in 2002, before overseeing the insurer’s U.K. business and, eventually, the French unit.
At Deutsche Bank, he’ll have to halt defections that can exacerbate investor withdrawals. At least six executives in the U.S. and 12 in Germany left the division in 2016, among them Henning Gebhardt, the former chief investment officer for Europe, the Middle East and Africa, and U.S. equities head Owen Fitzpatrick.
“We had one or two high-level departures, but overall it’s still under 2 percent, which is outstanding for the industry,” said Michalik.
“We’re keeping a close eye on staff turnover,” said Shannon Kirwin, an analyst with Morningstar Inc. Last year’s “hiring freeze, recent outflows and the overall uncertainty at the organization present challenges, but we haven’t yet seen signs that Deutsche’s core strengths have been materially eroded.”
The Americas business has been particularly hard hit by redemptions, losing 31 billion euros in invested assets since the end of the second quarter 2015, according to a company presentation. Deutsche Bank oversaw 205 billion euros in the region at the end of September 2016, making it the company’s second-biggest market after Germany.
The bank’s relatively large business offering exchange-traded funds should help the company profit as investors shift to low-cost index funds. The firm’s db X-trackers is the second-biggest ETF provider in Europe, but its market share slipped below 10 percent last year as customers pulled out 5.3 billion euros, according to Morningstar.
Compare that with BlackRock, the world’s largest money manager, which had $202 billion in net inflows last year, driven by $107 billion that went into its U.S. ETFs and an additional $32 billion into its European products.
Deutsche Bank said in a statement that the outflows followed “significant” inflows in the prior year, and reflected an investor shift away from European equities, where its ETFs are strong. The bank said it’s in the process of converting a large part of the European-listed fixed-income ETFs from synthetic into physical replication, which should strengthen it in 2017.
Cryan said at the World Economic Forum in Davos this month that asset management is one of the bank’s most valuable businesses and that he plans to keep it. The comments may reassure the staff, particularly after the bank announced this month that senior employees won’t receive much of their bonus for 2016.
‘We Like It’
“It’s a very stable source of earnings, and we like it,” Cryan said.
A partial IPO would help insulate the business from the parent company’s troubles and provide it with a currency for acquisitions.
Credit Agricole SA and Societe Generale SA combined asset management operations and in 2015 held an IPO for the venture, selling a minority stake to investors. The move let Societe Generale exit the business, known as Amundi, while raising money for international expansion. Today, Amundi is Europe’s largest asset manager. And when it completes a takeover of Pioneer Investments this year, it will oversee more than $1.3 trillion.