John Cryan changes Deutsche Bank’s course again

Four years ago, Anshu Jain declared that Deutsche Bank’s capital problems were off the table, after Germany’s biggest bank raised €3bn in a share sale. Twelve months later, he went back to investors for another €8.5bn.

On Sunday afternoon Mr Jain’s successor as chief executive, John Cryan, completed the hat-trick, announcing an €8bn rights issue of his own. Deutsche’s long-suffering investors are now hoping that the bank’s latest effort to shore up its balance sheet proves rather more enduring than its previous attempts.

“The problem is that Deutsche has done capital increases in the past only to come back for more cash and so there is a lot of scepticism in the market,” says one of Deutsche’s top 10 investors, who had not yet decided whether to join the rights issue. “It’s hard to combat this. You can only do it through actions, it’s not easy.”

Yet, while Deutsche is addressing longstanding concerns about its capital position, questions remain about both the clarity of its strategy, and how it will boost its weak profitability. Some of the steps announced on Sunday represent a direct reversal of the plans it set out in its two big strategy announcements of 2015.

Having said that it would sell Postbank, Deutsche will now keep the unit and integrate it over the next three to five years with its other German retail businesses. And having split its investment bank into separate markets and corporate finance units, it will now stitch them back together.

On a call with journalists on Sunday, Mr Cryan conceded Deutsche had a “change of heart” on parts of its strategy, but insisted the new approach made sense given how the macroeconomic and regulatory situation had changed since the group decided to offload Postbank, and how investment banking markets had picked up since it decided to split the division in two.

“It’s a positive . . . that we take the brave step of admitting we were going in the wrong direction, and that we corrected that and are going in what is now the right direction,” said Mr Cryan, who took charge in 2015 having previously been UBS’s finance director in the crisis.

The latest capital increase will be painful — the rights issue will increase Deutsche’s share count by 50 per cent — and investors responded by sending the bank’s shares down more than 7 per cent on Monday.

But it will certainly put the group on a far firmer footing. The €8bn rights issue, underwritten by a group of eight banks, is at the upper end of what investors had expected. It will propel Deutsche’s core capital ratio from 11.9 per cent at the end of 2016 to 14.1 per cent on a pro forma basis, a level that finally compares well with its peers. On top of this, Deutsche expects to raise another €2bn from disposals and the sale of a minority stake in its asset manager at some point in the next two years.

Deutsche will still face pressure from tightening capital rules, but now that Mr Cryan has settled some of its biggest legal headaches its balance sheet should be less of a hostage to fortune than over the past two years. It is also confident enough to promise the resumption of “competitive” dividend payouts from 2018.

“The return to dividends is a positive signal,” says Ingo Speich, a portfolio manager at Union Investment, one of Deutsche’s top 25 shareholders. “It underscores their belief in their business, and in a positive development of their operations.”

Mr Speich welcomed the more focused divisional structure and says Deutsche’s failure to find a buyer to match its valuation of Postbank meant that selling a stake in the asset manager was a “more efficient” way to bolster its balance sheet.

Others are less convinced. Selling a minority stake in the asset management unit while dropping the planned sale of Postbank was “a bit odd really”, says one banking analyst, arguing it means Deutsche was “keeping a dog and selling the crown jewels”.

The reorganisation will be accompanied by an additional sharpening of Deutsche’s cost-cutting targets, as well as a further €8bn cull of risk-weighted assets in its markets business by 2020. Helped by these steps, Deutsche is targeting a 10 per cent post-tax return on tangible equity (ROTE), once business conditions have “normalised”.

But analysts remain to be convinced that the bank can cut costs and assets without simultaneously losing revenues at such a rate that its profits fail to improve as much as hoped.

“Retaining Postbank with an ROTE of 4 per cent and selling a minority stake in [the asset management business] with an ROTE of over 30 per cent doesn’t help in this respect,” says Fiona Swaffield, an analyst at RBC Capital Markets.

Since fears about a pending fine for mis-selling US mortgage securities drove Deutsche’s shares down to 30-year lows in September, the bank’s market capitalisation has doubled to almost €25bn.

Deutsche’s beaten up valuation attracted new investors, including Chinese conglomerate HNA. Most analysts think investors will reluctantly provide the money Deutsche is asking for, even though this will be its fourth rights issue since the 2008 financial crisis, taking the total raised to nearly €30bn.

“There is always a view of ‘is this the last time yet?’” says Chris Wheeler, banking analyst at Atlantic Equities. “But John Cryan has a lot of shareholder support. He is very pragmatic, not very exciting maybe — but works very hard and he’s done it before at UBS so here we go again.”