World Economy

Deutsche Future in Doubt

Deutsche Future in DoubtDeutsche Future in Doubt

Forced to write off nearly €7 billion, Deutsche Bank is faltering. It can’t even rely on its core investment business any more. But how the German lender plans to get itself back on track isn’t entirely clear.

Thursday’s confirmation that Deutsche Bank had logged an unprecedented annual loss of €6.7 billion ($7.3 billion) didn’t come as much of a surprise. The markets had been expecting a so-called “profit warning.” And John Cryan, the bank’s co-CEO, has been saying since last autumn that it would take a miracle for the lender to book a better full-year result, DW reported.

But no one expected it to be this bad. After all, last year Deutsche was in the black by €1.7 billion.

All in all, Deutsche has had to write off about €6.8 billion–6.7 billion plus an additional 100 million. Most worrying of all: The bank can no longer rely on its core investment business. That sector accounted for a loss of €1.2 billion in 2015.

Indeed, it was a conscious decision to pull out of some of the bank’s most capital-intensive (and risk-intensive) areas of business. Its operations with interest rates and currencies are doing just fine. But the bank did “lose ground in the equity market,” Cryan said. “We are committed to invest in our employees in research and sales in order to win back market share.”

  Bank Needs Money

But that won’t really solve Deutsche’s primary problem: Germany’s leading lender is losing market share every day compared to its largest competitors, most of which are based in the United States.

Deutsche must urgently boost its earnings in order to pay for the wave of litigation it has been putting off for so long. Since 2012, the bank has had to pay €12.7 billion in settlements and penalties–€5.2 billion euros in the last year alone. Cryan didn’t want to reveal any figures for litigation in the current year, but he’s hoping that they will be less than in 2015.

In addition, the restructuring that Cryan and the other board members have promised is sure to carry a hefty price tag. Around €1 billion have been allocated so far for severance pay and other such expenses. Then there’s the modernization of the bank’s computer systems, which are primitive at best. The number of operating systems, for instance, is set to be reduced from 45 to four by 2020. According to current estimates, this change alone is going to cost €800 million.

  Domestic Market

Cryan and his outgoing co-CEO, Jurgen Fitschen, have been at pains to exude a sense of optimism. Fitschen, who will relinquish his position this summer, has been emphasizing the importance of Deutsche Bank’s connection to its domestic market, Germany. The bank wants to continue to be available for entrepreneurs and businesses, even startups. The image that Fitschen wants Deutsche to have when he leaves is of the good old neighborhood bank.

Cryan described what has been done since summer–when he took over the job–to get the company back on track. Business divisions have been restructured. Special decision-making bodies operating outside of the board have been dismantled. The sale of problematic investments in the Chinese Hua Xia bank is practically a done deal.

Progress has been made towards the planned sale of Postbank, though CFO Marcus Schenck admitted it could stall in light of the current market environment. Cryan says that the large-scale restructuring will require “time, determination and patience.” But time is a scarce resource–as he spoke during the press conference, stocks slid further, nearing a seven-year low.

Cryan said he is aware of how hard it will be to win back the trust of the bank’s shareholders. There will not be a dividend again until 2017 at the earliest. But maybe the bank will be able to get itself back in the black in 2016.