After many scandals and horrendous losses, Germany’s largest bank has almost completed its restructuring. Credit Suisse still has this painful path ahead of it. The example of Deutsche Bank shows that restructuring is not a sprint but a marathon.
The Deutsche Bank logo is reflected in Frankfurt’s glass facade: the institute was ailing for a long time before the board of directors dared to start the renovation.
In the summer of 2019, CEO Christian Sewing had scheduled three and a half years to restructure Deutsche Bank by the end of 2022. Since then, things have been gradually improving, and it ultimately took a good two years before Germany’s largest financial institution found itself in much calmer waters. Even though not all goals will be fully achieved by the end of the year, the bank is now in a decent position again.
In the first half of the year, the institute achieved a result attributable to the shareholders of 2.1 billion euros – that was the highest gain since 2011. Deutsche Bank gave up the title of Europe’s crisis and scandal bank – and apparently passed it on to Credit Suisse in Zurich.
Loss of billions and change of boss
The Swiss bank, which is often compared to Deutsche Bank, has been reeling from affair to affair and bankruptcy to bankruptcy for at least two years. With the renewed loss of billions and the change in management from Thomas Gottstein to Ulrich Körner, the phase of tough restructuring should finally have begun for Credit Suisse too. Körner should not waste any time, because every lost day costs employees nerves, stakeholders trust and shareholders money.
After all, Sewing, who has been in office in the Frankfurt twin towers since April 2018, needed a good year to finally initiate the far-reaching restructuring and realignment of business activities that was long overdue at the time. For the first year, he was very busy getting used to his new job and examining a possible merger with Commerzbank – only to then properly shelve it. Ulrich Körner shouldn’t wait that long to get Credit Suisse on course. In any case, there is speculation on the markets that the bank is ultimately a candidate for sale.
Starting in 2015, Deutsche Bank had destroyed around 15 billion euros as a result of numerous scandals and five years of losses in a row, with many observers even questioning the survival of the institute at times. As a result of the largest restructuring in around two decades, which was then initiated in the summer of 2019, Sewing ordered a reorganization of the Management Board and a restructuring of the business units. In essence, the institute significantly reduced its activities in investment banking. Deutsche Bank said goodbye to stock trading and reduced its business with interest rate products.
Charges from the bad bank
In addition, the institute founded a kind of bad bank in order to be able to show the performance of the future core units better. €288 billion, or 20 percent of total debt, and €74 billion in risk-weighted assets were brought into the bad bank. To this day, this isolated unit is burdening Deutsche Bank’s results – with a downward trend. In the second quarter it was still 181 million euros. Furthermore, a reduction of 18,000 jobs to 74,000 by the end of 2022 was originally planned. However, Deutsche Bank has now conceded the goal. It currently has 83,000 full-time positions. Credit Suisse comes to a good 51,000.
Deutsche Bank’s results for the second quarter and first half of 2022 largely exceeded investor expectations this week. Today’s four core units – investment bank, corporate bank, retail bank and asset management under the DWS brand – all improved their earnings in unison. In particular, the investment bank and the corporate bank surprised positively.
While the investment bank benefited above all from the good business with fixed-income securities and currencies, as well as trading in interest rate products, currencies and business with emerging markets, the corporate bank received tailwind from the improving interest rate environment, a generally higher business volume and increased commission income. Actually, Deutsche Bank should now be based on four roughly equal pillars, but the investment bank is still the dominant entity despite the resizing – in good times and bad. This may well continue to apply to Credit Suisse in the future.
Criticism of missed cost targets
However, the cost targets are shaky. Management should be particularly hurt because investors have been accusing the bank of not having costs under control for years. Although Sewing is still aiming for a return of eight percent on tangible equity for the current year, the institute now considers the achievement of the target to be “more challenging”.
In addition, the targeted cost-income ratio of 70 percent is likely to be missed and at best be below 75 percent for the year as a whole. The institute refers to the high bank levies, inflation, costs from the Ukraine war and legal disputes.
It is noticeable, however, that the number of employees was not reduced nearly as much as originally announced during the restructuring. The strong trade unions in Germany as well as the fear of negative headlines in the media and harsh reactions in public and politics are likely to be decisive for this. In this area, it would probably be easier for Credit Suisse to significantly reduce costs at the investment bank in New York and London and in Switzerland in general, if necessary.
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