Several of Deutsche Bank’s biggest shareholders are calling for its chief executive to make deeper cuts to its perennially lossmaking US investment bank as they run out of patience with the lender’s poor performance and tumbling share price.
Four of the 10 biggest shareholders in Germany’s largest bank have told the Financial Times that they want Christian Sewing to take more decisive action in turning round the faltering division, particularly in the US.
The pressure on Mr Sewing has risen as Deutsche Bank’s share price has fallen by a third in the 10 months since he took over. One of the investors said they told the bank recently that they wanted it to shrink the US investment bank by this summer.
At least four members of Deutsche Bank’s supervisory board share the view that further cuts to the US investment bank are necessary, people familiar with their thinking told the FT.
There are also doubts over the position of Garth Ritchie, head of Deutsche Bank’s investment bank. “Christian needs to make a change in the next few months,” one big investor said, referring to a potential management shake-up.
Last September, the supervisory board unanimously extended Mr Ritchie’s contract for five years. But the FT reported last November that members of the supervisory board were pushing for his removal and since then concerns have grown over whether he is the right person for the job.
Revenue has dropped by a third at Deutsche’s investment bank over the past three years, with analysts expecting another decline this year. According to a person briefed on the matter, its US investment bank has been lossmaking in nine of the past 10 years. Last year, it was put on a federal list of problem banks.
After his appointment last April, Mr Sewing made some cuts to the investment bank, particularly equities and prime brokerage services for hedge funds. Overall, it shed 7 per cent of its front office investment banking staff and is poised to cut bonuses.
Cerberus, which has a 3 per cent stake in Deutsche Bank, has deployed former JPMorgan executive Matt Zames to probe how the German lender’s balance sheet and capital could be better used.
Mr Sewing appears to be resisting further cuts and recently said he wants to maintain the investment bank on a “broad footing”.
A Deutsche Bank spokesman said on Wednesday: “We have adjusted our footprint in our corporate and investment bank and in the US already in 2018, including reducing our leverage exposure by more than €100bn.” The spokesman added that the lender had “completed our adjustments ahead of schedule” and there was now a good foundation for growth.
Another person familiar with the bank’s strategy said that its top managers were fully committed to the US, a market it considered the most important after Germany, adding that no further cuts had been demanded by large shareholders in direct talks with top managers.
But large investors told the FT that they do see the need for tougher action, including a serious reduction in the bank’s cash equities and corporate finance businesses, structured products, and underperforming parts of its fixed income, currencies and commodities trading unit. One top shareholder wants a strategic shift away from the US towards Europe and Asia.
JPMorgan Chase analysts estimated last year that Deutsche Bank’s US operation was losing 25 cents for every dollar of business it does. That threatens to deteriorate, given toughening regulatory capital demands and elevated funding costs.
Two top 10 shareholders previously supportive of maintaining a large investment bank said they now backed cuts.
One of them said it could even be desirable to shrink the US bank to below the $50bn asset threshold above which it is regulated more strictly as an “intermediate holding company”. Deutsche Bank’s US broker-dealer and commercial bank currently have a combined $132bn of assets, according to a regulatory filing.
A third big shareholder said that any divisions earning less than their cost of capital should be addressed and in some cases cut back.
Another top shareholder told the FT that even if action was not immediately necessary, Deutsche Bank must have a cuts-based “Plan B” in case markets deteriorate severely. However, that person also stressed that managers had made meaningful progress on restructuring.
Mr Sewing told analysts in early February that the bank “will work to offset any weakness with further cost reductions” should revenue growth be weaker than expected.
In the fourth quarter of 2018, the investment bank’s return on tangible shareholder equity was a negative 2.2 per cent — a far cry from its medium-term target of 10 per cent.
