Investors Say New Boss Brings Fresh Eye to Deutsche Bank's Challenges

Frankfurt/London: John Cryan faces the briefest of honeymoons as chief executive of Deutsche Bank.

Investors believe the Briton is a more credible contender than his predecessors to revive the fortunes of Germany's largest bank and its shares rose 8 per cent on Monday after the weekend departure of co-executives Anshu Jain and Juergen Fitschen.

But Mr Cryan will be tested at the end of July when he has to update investors on a turnaround plan - Strategy 2020 - that he was heavily involved in creating in his role as a non-executive director and which has so far failed to win them over.

Fed up with weak returns, shareholders want Deutsche Bank to be more ambitious about slashing costs and are hoping Mr Cryan will use his experience of restructuring Swiss bank UBS in the wake of the financial crisis, to accelerate the plan to cut 4.7 billion euros of costs in five years.

"Cryan takes on the role of CEO with an excellent reputation from his days at UBS," said Guy de Blonay, manager of the Jupiter Financial Opportunities Fund. "He offers a fresh start."

Under Mr Jain and Mr Fitschen, Deutsche stuck to an expensive universal banking model and the bank is now playing catch-up with rivals such as UBS and Barclays which have moved faster to axe unprofitable business lines.

Deutsche's "Strategy 2020", which aims for a return on tangible equity of at least 10 per cent by 2020 compared to the previous target of 12 per cent for 2015, involves shrinking parts of its investment bank and selling off its Postbank retail unit.

Mr Jain and Mr Fitschen had originally favoured a more radical plan to get rid of Deutsche's entire retail business and become a pure investment bank and wealth manager but they dropped it due to regulatory hurdles and opposition from Berlin, supervisor concerns and one trade union.

Mr Cryan is expected to stick to the current plan and focus on its execution when he presents to investors next month.

"We look forward to the management board providing a detailed explanation of Strategy 2020," corporate governance advisor Hermes EOS, which had previously called for an overhaul of the bank's top brass, said in a statement.

Unlike rivals such as UBS and Credit Suisse, which have strong wealth management arms or HSBC, which has a big Asian operation, Deutsche is hampered in its ability to significantly cut its investment banking operations because it does not have a strong retail business or asset management business at home to fall back on.

Legacy matters

Although he joined Deutsche as a non-executive director in 2013, German-speaking Mr Cryan is seen as a clean slate for the bank because he is not associated with any of its divisions. Many of the scandals swirling around Deutsche emanated from the investment bank which Jain used to lead.

"Crucially, I believe Cryan will be able to review the size and scale of the investment bank with a much harsher lens than Anshu Jain," said Mr de Blonay.

"Jain's efforts at restructuring this part of the bank were always hampered, in my view, by the fact that he essentially built the division from scratch."

India-born Mr Jain, who resigned over the weekend after weeks of pressure from investors, failed to meet cost and profitability targets as CEO and his inability to speak German made it difficult for him to connect with rank and file staff.

Meanwhile Mr Fitschen, who was meant to maintain the bank's German profile, was compromised by a court case linked to the demise of the Kirch media empire which required him to appear nearly every week at a criminal court in Munich.

Mr Jain will stay on as a consultant to Deutsche until January 2016 while Mr Fitschen will stay on as co-CEO until next May. They both had contracts which ran to March 2017, with Jain's contract worth approximately 15 million euros if he had seen it out, a source familiar with the situation said.

In a memo to staff seen by Reuters, the chairman of Deutsche Bank's supervisory board, Paul Achleitner, stressed that Mr Cryan was not associated with any of the activities that has seen it become the target of heavy fines and burdensome investigations.

"He brings an external perspective but is deeply familiar with Deutsche Bank; he has experience in our industry but is unassociated with legacy matters," Mr Achleitner wrote.

Nevertheless, some analysts were sceptical that a change at the top would be able to reverse the bank's fortunes.

Deutsche Bank was recently fined a record $2.5 billion for rigging benchmark interest rates and there could be more penalties in the offing with the bank looking into possible money laundering transactions by some of its clients in Russia.

Analysts at Morgan Stanley estimate that Deutsche will have to pay another 3.2 billion euros in litigation costs between now and 2017.

Trade union resistance to job cuts is also unlikely to disappear and the sale of the Postbank network is not expected to generate enough money to compensate for the more than six billion euros Deutsche has invested in it.

It will also be hard to pare the balance sheet in the investment bank without incurring losses as many of the capital heavy assets, such as long-term repurchase agreements can only be sold at a loss.

"We struggle to see how the change in CEO at Deutsche Bank (DBK) makes it a long-term winner at the moment," analysts at Berenberg wrote.

"The longer-term issue about the core profitability of the business needs more than a new CEO to resolve."