Deutsche Bank Abandons Wall Street Ambitions, and Focuses on Europe
By JACK EWINGAPRIL 26, 2018
Deutsche Bank is effectively abandoning its efforts to be a Wall Street titan under its new chief executive, Christian Sewing. Credit Armando Babani/EPA, via Shutterstock
Deutsche Bank said on Thursday that it would shrink its operations in the United States and Asia and focus on Europe, effectively abandoning its ambition to be a member of Wall Street’s big leagues.
The decision, after years of losses, scandals, and management turmoil, ends a 20-year quest by Germany’s largest bank to compete eye to eye with the likes of Goldman Sachs and JPMorgan Chase.
But it also leaves those behemoths dominant in global investment banking, entrenching a concentration of financial power that may unsettle some political leaders at a time of rising tensions over trade.
Deutsche Bank will retain a presence in the United States, but scale back operations such as trading and providing services to hedge funds. Instead, in the first major shift by Christian Sewing, who was this month appointed the bank’s third chief executive in three years, it will concentrate on European clients.
“This is not an exit from the U.S. business,” Mr. Sewing insisted during a conference call with analysts on Thursday.
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But he said that the bank would aim to become less dependent on revenue from investment banking, which is often erratic, and instead look for growth in markets closer to home like Italy and Spain.
Mr. Sewing spoke after Deutsche Bank said Thursday morning that net profit had fallen nearly 80 percent in the first quarter of 2018 to 120 million euros, or $146 million, on revenue of €7 billion.
The meager return “underscores the need for immediate action,” said Mr. Sewing, a risk management specialist who replaced John Cryan as chief executive at the beginning of April. “Our shareholder returns are not satisfactory.”
The plan will also include job cuts, but Deutsche Bank did not give specifics.
Deutsche Bank became a major presence on Wall Street in 1998 when it acquired Bankers Trust. But the deal was troubled from the start. The $10.1 billion purchase price was widely viewed as inflated, and the risk-happy traders of Bankers Trust clashed with Deutsche Bank’s conservative German leadership.
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The hidden risks of Deutsche Bank’s investment banking operations became clear after the onset of the financial crisis in 2008. The bank had a hand in virtually all of the major scandals of the era. It paid billions of dollars in fines and settlements related to the fraudulent sale of mortgage bank securities, and over its role in a conspiracy to rig the benchmarks used to set the interest rates on trillions of dollars in loans and other financial products.
Still, Deutsche Bank was more reluctant than its European rivals to reduce its Wall Street presence. Others like Credit Suisse moved more quickly, and have since been rewarded with better profits.
Deutsche Bank’s position in investment banking has become increasingly untenable. The bank’s share price has fallen 30 percent since December, and it has not reported an annual profit since 2014. The stock market values the bank at less than half of the nominal value of its assets, an indication that investors believe there are hidden risks.
Traders seemed Thursday to be waiting to see if Deutsche Bank’s latest strategic plan by would be more successful than others. The bank’s stock price was little changed at €12 per share.
Deutsche Bank has also been under intense pressure from regulators. The European Central Bank, which has ultimate authority for bank regulation in the eurozone, has asked the lender to calculate the cost of winding down its derivative holdings.
Though the analysis is hypothetical, it underscores regulators’ concern about risks that may be lurking in Deutsche Bank’s balance sheet.
Mr. Cryan, who served less than three years as chief executive, had already started trimming the investment bank. But he was criticized as not moving fast enough. Mr. Sewing’s plan appears to go much further by explicitly shifting the focus from the United States to Europe.
“We will change the path of our bank now,” Mr. Sewing said. “There is no time to waste.”
Follow Jack Ewing on Twitter: @JackEwing