27 March 2018

The biggest risk to Deutsche Bank if John Cryan goes

What is happening at Deutsche Bank? Today’s Times story suggests that not only has John Cryan lost the confidence of the board, but that the board has is busy selectingpotential candidates to replace him, one of which (Richard Gnodde of Goldman Sachs) has already turned the job down.  This is not an ideal situation.  What’s going on?

There are several reasons why bank CEOs get sacked.  First, there is a general presumption that each CEO only gets to do one major equity issue. John Cryan has already played his card here, with the €8bn capital raising completed in April 2017.  Because of this capital raise Deutsche currently has a Common Equity Tier One ratio of 14%, versus a regulatory requirement of 10.65%.  This leaves the bank with plenty of headroom for organic business growth, but probably not in a position where it could really take part in any round of consolidation in European banking.  It maybe that the board think that more capital is needed, and that although Cryan has done a good job in taking Deutsche past its near-death experiences in 2016, a new face is needed to deal with the challenges of returning to growth. It may even be the board wants to be more aggressive in rebuilding Deutsche’s franchise in the USA.

That’s one possibility.  Another way that CEOs get fired, though, is when the board no longer believes in their strategy.  The most seismic thing that Deutsche could do would be to turn away from investment banking and concentrate on its franchises in payment services, German retail banking and corporate lending, with very large associated job losses.  If you work in Deutsche’s corporate and investment bank, this will be your fear.

This also seems unlikely, though.  Deutsche’s CIB division is more than half the bank by earnings, and although it earned roughly the same rate of return as the other divisions in 2017 (1.4% RoE versus 2% for the Private and Commercial Bank), it could at least be argued that CIB’s problems are cyclical.  The PCB returns have been low for as long as anyone can remember, and are linked to the fact that Germany is a structurally over-banked market, where pricing is set by state-owned and mutual competitors.

Added to this, the names that have been attached to the job would not suggest a major strategic shift. – Gnodde is a pure investment banker, and while Jean-Pierre Mustier currently heads Unicredit, his background is also in investment banking, as is Bill Winters’.  So although some parts of the Deutsche empire – particularly the remaining U.S. businesses, which really look like they need to be either further invested in or shut down – might be early losers from a new CEO, radical change affecting the core trading operations looks unlikely.

Perhaps most plausible, though, is the most depressing alternative for shareholders, and for employees.  Sometimes, CEOs get fired simply because of “sick building syndrome” – a management culture that is inimical to long term planning.  Deutsche has lost plenty of senior management over the last ten years, and Cryan’s disagreements with Paul Achleitner over the relationship with HNA, the largest shareholder, have been public knowledge.  You can generally afford to have a fight with your chairman, or your investors, but not both at once.  If Cryan is under fire simply because he has got on the wrong side of the supervisory board, that might make it very difficult to hire the right candidate to replace him.  The biggest risk right now for Deutsche employees is that of an Anthony Jenkins figure – a compromise candidate promoted into the top job simply because he has not been associated with any of the past problems, who ends up making quite destructive changes to the business simply out of a need to be seen to do something.

Dan Davies, is a senior research advisor at Frontline Analysts and a former banking analyst at Cazenove, Credit Suisse and BNP Paribas.