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Deutsche’s renewal

19 December 2014 By Dominic Elliott

Deutsche Bank’s board faces a stability test. The German lender says it will review its direction and targets in 2015. Its bet on capital markets remains unproven and likely regulatory settlements in the coming months could raise further doubts. Recent executive moves suggest Deutsche is keeping options open for strategy and leadership change.

Co-Chief Executives Anshu Jain and Juergen Fitschen are committed to a full service investment banking model. But the credibility of this took a knock in May when the bank pushed back a 12 percent return on equity target by one year to 2016. Deutsche is now forecast to make a RoE of just 6 percent in 2015, Eikon SmartEstimates show, less than any of its nine largest peers.

It’s not clear precisely what Deutsche has is mind. The introspection could lead to a sale of retail unit Postbank, sources have told Reuters. The business also accounts for a chunky 11 percent of Deutsche’s non-core assets. Selling it would improve the firm’s skinny 3.2 percent Basel III leverage ratio. A sale would also leave Deutsche even more reliant on investment banking, which would jump to half of group revenue, up from 45 percent currently.

There may be further pressure on the co-CEOs if Deutsche announces UK and U.S. settlements following industry probes into failings around Libor. These are likely to happen in the coming months, says a person familiar with the situation. Unlike other banks, Deutsche has not yet been involved in settlements for foreign exchange benchmark-rigging. The UK’s Financial Conduct Authority told the bank in November it would not be taking action against it in relation to a settlement with five other banks. Deutsche has 3 billion euros in legal reserves.

Ongoing internal investigations into the Libor and FX debacles have found nothing that implicates Jain or Fitschen, says a person familiar with the reviews. But any settlements will offer a pretext to rethink governance.

Recent executive moves suggest Deutsche is already thinking about succession. In October, Chairman Paul Achleitner hired Marcus Schenck from Goldman Sachs to take over from Stefan Krause as chief financial officer. Krause, in turn, has been tasked with shaping Deutsche’s strategy beyond its so-called “2015+” plan. Both look like possible CEOs in waiting, alongside Stephan Leithner, head of regulatory affairs, and retail bank head Rainer Neske.

Deutsche’s performance in 2015 will be critical. If it slips, it will be hard to separate the strategic review from who should preside over Deutsche’s next phase of evolution.

 

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