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How Deutsche Bank drifted into its whirlpool of woes

Turbulence ahead?
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Turbulence ahead?

At this point, Deutsche Bank AG’s biggest problem may be how many problems it has, how long they’ve gone on and how they’ve fueled one another. Years of low profits have spawned a long series of failed turnaround plans and a steady departure of senior executives. Another proposed fix -- taking over rival Commerzbank AG -- fell apart in late April when Chief Executive Officer Christian Sewing decided that the deal would do more harm then good. As Germany’s biggest lender works to dramatically shrink and reshape its operations around the globe, here’s a look at how this once-dominant firm landed in its current mess.

Source: Bloomberg

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​ What’s gone wrong?
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​ What’s gone wrong?

For many years, the bank has been caught in a downward spiral of declining revenue, sticky expenses, lowered credit ratings and rising funding costs. It’s repeatedly tried to reverse the slide, without success. Problems include outdated technology, a talent drain and heavy fines -- $17 billion in the last decade -- for misconduct. Adverse market conditions have compounded the homemade difficulties. The bank’s shares lost more than half their value in 2018 and have continued to underperform the broader industry this year.

AFP
 Why hasn’t it been able to turn itself around?
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Why hasn’t it been able to turn itself around?

It’s been cutting costs to pare down to a more profitable size, but it’s been losing business even more quickly. The corporate and investment banking unit, responsible for more than half of total revenue, has lost market share to rivals that were quicker to fix balance-sheet and governance weaknesses after the 2008 financial crisis. The issues facing Deutsche Bank are also affecting many other European banks. The European Central Bank is expected to hold interest rates near zero into 2020, revenue at bank retail units is likely to stay depressed. For Deutsche Bank, the situation is made worse by the structure of its home market, where numerous smaller banks keep margins razor-thin.

Reuters
​ What’s the turnaround strategy?
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​ What’s the turnaround strategy?

Sewing, who took over in April 2018, has been accelerating cost cuts and scaling back global ambitions. In its latest plan, the bank is considering slashing headcount by more than a fifth, or as many as 20,000 jobs. The biggest hit is likely to fall on the investment banking division, particularly in the U.S. He’s looking at drastic cuts to equities and interest rates trading and may shutter those businesses in several countries outside Europe, people familiar with the matter have said. Deutsche Bank had 91,500 staff at the end of the first quarter, down from 95,400 when Sewing took over. The CEO wants to shift the bank away from its focus on institutional clients toward meeting the trade finance and cash management needs of large companies.

AP
​ How would that restore the bank’s health?
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​ How would that restore the bank’s health?

The idea is simple: Stop spending money on businesses that haven’t turned a profit in years and free up funds for profitable businesses that Sewing hopes to grow. Exiting businesses could leave Deutsche Bank with billions of euros of assets it no longer wants. It’s planning to create a dedicated unit to help sell or wind down those holdings, a solution sometimes referred to as a “bad bank.” Separating the unprofitable activities into another unit will also likely boost the reported results of its core operations, potentially improving investors’ perception of those businesses and -- ultimately -- boosting the bank’s battered share price.

AFP
​ Why will the next turnaround be so big?
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​ Why will the next turnaround be so big?

There was a growing sense the bank is running out of options after Sewing’s first turnaround effort last year fell short and merger talks with Commerzbank went nowhere. The market perception of Deutsche Bank’s creditworthiness took another hit in 2018, doubling the cost of insuring against a default on its debt and ramming home once again its vulnerability to events outside its control. Investors have also long been pushing for a deep cuts to the investment bank that all other previous turnaround plans have largely shied away from -- one of the key reasons why they have failed, according to many market observers.

AFP
​ Can the new plan succeed?
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​ Can the new plan succeed?

There’s some optimism: As details of the latest plan began trickling out, Deutsche Bank’s stock price rose slightly and its cost of credit insurance fell. Many stakeholders agree that the bank needs to cut costs radically and rein in its global ambitions if it ever wants to become meaningfully profitable again. But analysts have also pointed to the bank’s patchy track record of delivering on grand restructuring plans as well as questions over how it plans to cover the presumably high restructuring costs given Sewing wants to avoid raising money from shareholders.

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