For much of the last decade, German politicians and bankers have been doing the rounds of European capitals, wagging their fingers at their euro zone counterparts and urging them to sort out their banks.
Nemesis has now come calling, and its name is Deutsche Bank.
This week, as its share price sank to a new low and investigators pursuing a money-laundering inquiry linked to the Panama Papers tax evasion disclosures searched its headquarters in Frankfurt, Germany's largest bank looked less like the epitome of German financial prowess and more like the last dinosaur wandering the earth after the meteor struck.
Christian Sewing, Deutsche Bank's fifth chief executive in little more than a decade, was even forced to address speculation that it might be a takeover target. Since the bank's revenues are sliding, and it has not reported an annual profit for three years, the notion is legitimate.
It also speaks volumes about the plight of what was once one of the world’s mightiest financial institutions.
The scale of Deutsche Bank's decline since the financial crisis tore through the global banking industry a decade ago is best captured in its share price, which has fallen 90 per cent from its all-time high in 2007. Its stock market value this week was just €16 billion – roughly the same as that of Allied Irish Banks and Bank of Ireland combined.
How on earth did that happen? Europe's weakest banks were supposed to be in Italy, and its strongest in Germany. Yet a decade after the financial crisis, and five years after the euro zone emerged from its depression, Europe's strongest banks are French, while Italy's have weathered the crisis and returned to profit. Germany is now the European Union's most unstable banking market, and German banks are among the weakest in the euro zone.
Deutsche Bank’s plight is the consequence both of its German home and of its universal ambitions. It is difficult to make a profit as a German high street bank. The market is ferociously competitive, dominated by savings banks that are more effective at harvesting the cash of ordinary Germans. This is a problem for Deutsche Bank because – unlike, say, its US rivals – it has built its global operations on a weak domestic market position.
That explains the travails of the global operations. Deutsche Bank entered investment banking with the acquisition of Bankers Trust two decades ago. But Bankers Trust was not a top-tier investment banking franchise, and Deutsche Bank has failed to turn it into one. In its pursuit of US business, it was instead left with the scraps, including becoming the go-to lender for a certain Donald Trump.
Accident prone
Deutsche Bank's accident-prone global operations have led to regulatory fines and penalties of some $18 billion since 2008, according to Bloomberg. Yet that is not their only legacy. Since it bought Morgan Grenfell in 1989, giving it a huge presence in London, Deutsche Bank has been riven by Anglo-German rivalries.
It tried to overcome these in 2015 by appointing John Cryan, a Briton, as chief executive. But he was given the boot in April when his turnaround plan was considered to have failed. That decision was taken by Paul Achleitner, the European grandee who chairs Deutsche Bank. Mr Achleitner then appointed Mr Sewing, a bank lifer and, probably more importantly, a German.
Deutsche Bank’s real challenge, though, is more deep-rooted. It is locked into a model of universal banking that looks increasingly archaic in the post-2008 banking world. It is wedded to this long-established strategy, despite its manifest failings, yet appears to have lost the tactical ability to execute it. One might say, in a reversal of the usual accusation, that Deutsche Bank is all strategy and no tactics.
Cost base
One result of this failing strategy is a cost base – all those high street clerks at home and lavishly paid investment bankers in London and New York – that exceeds its rivals. Deutsche Bank employs nearly 100,000 people. Its cost-income ratio in the third quarter of 2018 was 90 per cent, compared to about 62 per cent for European banks generally. (AIB’s was 51 per cent in the first half of this year.)
The shrinking of Deutsche Bank matters for the euro zone, since it is a “sifi” – a systemically important financial institution. It is also reasonably well capitalised. The challenge for European regulators is not that Deutsche Bank will collapse but that it will become a disruptive presence in the European banking market if it continues to shrink.
Yet its fate is a political headache for Berlin, because Deutsche Bank's fate matters for Germany. German banking cries out for post-crisis restructuring, as happened in many other countries. Deutsche Bank tried to lead that process, with the acquisition of Postbank in 2010. Now it could end up as its unexpected next victim.
