Reuters: Regulatory News: New era for Deutsche Bank, Ackermann prepares to go

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New era for Deutsche Bank, Ackermann prepares to go May 10th 2012, 09:27 Thu May 10, 2012 5:27am EDT * Deutsche Bank appoints veterans to succeed Ackermann * CEO role carries special political weight in Germany * Deutsche has biggest balance sheet in Europe * Deutsche's growth strategy at odds with political agenda By Edward Taylor and Philipp Halstrick FRANKFURT, May 10 (Reuters) - For decades, the men running Germany's flagship lender Deutsche Bank have straddled the world of finance and politics, advising chancellors on everything from post-war reconstruction to euro zone crisis management. The departure of Switzerland's Josef Ackermann after a decade at the helm of the Frankfurt-based bank could change all that, testing Deutsche's ties to Berlin when politicians and regulators are putting bankers on an ever shorter leash. Next month, Ackermann will make way for not one but two successors. Anshu Jain, an Indian-born investment banking star, and Juergen Fitschen, an affable Deutsche veteran, will share the role of CEO from June in an unusual dual leadership structure some investors say could prove unwieldy. To ensure success, they must keep a lid on rivalries between the bank's Frankfurt headquarters and its London office, where Jain has spent most of his 17-year Deutsche career, and maintain the political relationships that Ackermann cultivated. Worries that Deutsche would be neglecting its German roots by putting the 49-year-old Jain, who is still honing his German language skills, alone in the top job prompted the supervisory board to adopt the dual CEO model. "There is the political dimension which is arguably the most important part of what they do now, particularly in Germany," said Franklin Allen, Nippon Life Professor of finance and economics at Wharton, University of Pennsylvania. "Deutsche Bank is a special case. It is an icon, a national champion." TIES TO GOVERNMENT Previous chief executives include Hermann Josef Abs, who led the bank from the late 1950s and was instrumental in advising Chancellor Konrad Adenauer about German debt negotiations. Former chancellor Helmut Schmidt turned to Wilfried Guth, who headed the bank in the late 1970s to help prepare global economic summits. Alfred Herrhausen, the Deutsche chief who was assassinated by leftist guerrillas weeks after the Berlin Wall fell, was a close adviser to Helmut Kohl. "The position of CEO of Deutsche Bank has always had a political dimension," Ackermann told Reuters earlier this year. He too has emerged as a go-to man for Berlin. Angela Merkel hosted a dinner for him at the Chancellery in the spring of 2008 to celebrate his 60th birthday. Less than half a year later, the bankruptcy of U.S. investment bank Lehman Brothers triggered a global financial crisis. Ackermann's influence became clear soon thereafter in talks on the fate of Hypo Real Estate, the Munich-based lender that was plunged into a financing crisis when money markets froze. At a meeting in September 2008, Joerg Asmussen, then a junior finance minister, said Berlin would not bail out the real estate lender, sparking fears of an escalating bank crisis. "Out of frustration we opened a good bottle of red wine, and began speculating about how badly markets would collapse," one of the people present at the meeting recalled. It took a late night phone call between Ackermann and Merkel for Berlin to understand what was at stake, and for Germany to agree to help fund an initial 35-billion-euro ($45.26-billion)bailout, a person familiar with the matter told Reuters. ANSHU'S ARMY So far meetings between Jain and Merkel have gone well, said a person familiar with Berlin's thinking. A keen wildlife photographer, Jain landed the job because the legion of traders dealing in currencies, commodities and debt - dubbed "Anshu's Army" - has consistently delivered the lion's share of group profits and frequently outperformed peers. One reason he has struggled to build a network in Germany is because this was traditionally the territory of Ackermann or Fitschen, a 63-year old who has had responsibility for Deutsche's home operations. Many say Jain will eventually become the sole chief executive. His contract runs until March 2017, while Fitschen's will expire almost two years before that. Jain has tried to placate politicians by emphasising a more conservative approach in investment banking, and by backing the expansion of retail banking and wealth management as a "second pillar" at Deutsche. The new leadership team also plans to increase the proportion of cross selling between the investment bank, asset management and wealth management divisions, said a person familiar with the bank's thinking. But the departure of several senior figures, including risk manager Hugo Baenziger and the promotion of investment bankers loyal to Jain have raised eyebrows in Germany. "For us corporate governance is in focus. The dual leadership structure is pragmatic but bears risks," said Ingo Speich, fund manager at Union Investment, in Frankfurt. "Unnecessary friction should be avoided and attention needs to be paid to prevent a split between investment banking and the German client business." EXPANSION DRIVE During Ackermann's tenure, Deutsche Bank built an investment banking franchise to compete with Wall Street-based rivals. The expansion drive was led by a cabal of defectors from Merrill Lynch, headed first by Edson Mitchell and later Jain, who instilled a culture of fierce loyalty and bonus-driven performance at the staid German corporate bank. Unlike Swiss competitors UBS and Credit Suisse which were able to use profits from wealth management to build up their investment banks, Deutsche relied mainly on organic growth to fund its expansion. In 2002 the corporate and investment bank accounted for only 21 percent of the bank's overall pre-tax profit. By 2010 this had swelled to 71 percent. Along with this shift came an increasing appetite for risk. Deutsche took big bets, including on the subprime market. It came through the global financial crisis without requiring a state bailout but has nonetheless radically pared back the scale of its bets and closed its proprietary trading desk. Last year, the corporate and investment bank's share of profits was reduced to 44 percent, in part thanks to the acquisition of retail bank Deutsche Postbank. Deutsche has said the appointment of Jain and Fitschen, who between them have more than 40 years experience at the bank, will bring continuity and stability, a strategy which could help Germany's largest bank absorb market share as rivals pull back. As its Swiss rivals cut jobs, Deutsche has said it has no plans to reduce staff. Deutsche is betting on economies of scale to grow the "flow monster", a moniker used to describe the volume of transactions flowing through Deutsche's trading desks. Deutsche has moved into fourth place globally for advising on global mergers and acquisitions, up from 11th last year, and is ranked second among bookrunners in global debt, behind JP Morgan, ThomsonReuters data shows. The bank's market value stands at about 28 billion euros, close to what it was a decade ago. But its share price has fallen over the same period, to roughly 30 euros today from around 70 euros a share when Ackermann started. DIVERGING INTERESTS Deutsche's efforts to win market share come at a time when global regulators are trying to pare back risk taking and to limit the damage a collapsing bank can wreak on the broader financial system. "The interests of banks and politicians have diverged, with banks seeking to preserve the same level of profitability and pay, and politicians demanding banks shrink," Wharton professor Allen said. "Banks will try to maintain profit levels either by taking on greater levels of risk, or by growing in size through market share gains and economies of scale. Both of these trends are at odds with current politics." Deutsche has the largest balance sheet among European banks, with a total 2.103 trillion euros at the end of the first quarter, an increase from 758 billion euros in 2002, the year when Ackermann became the first non-German to take the helm. The bank says the level of risk taking has fallen 14 percent year-on-year using a methodology known as value-at-risk, which estimates the maximum total loss a bank could expect from one day's trading. But risk weighted assets rose 32 percent over the past 12 months at the corporate banking and securities arm. Deutsche's expansion has brought with it a raft of legal issues which are a concern for some investors. Deutsche stands accused of misleading investors about the quality of risky residential mortgage-backed securities they sold to investors. Among those suing Deutsche for $1 billion is the U.S. government. "Litigation risks are the biggest problem for the bank. The costs for litigation are no longer one-offs, they are a risk which weigh on the value of the bank," said Ioannis Papassavvas, European Proxy Voting Officer at Allianz Global Investors. The bank's new leaders will need to convince politicians and regulators their growth strategy and the bank's legal problems are compatible with efforts to make the financial system safer. Link this Share this Digg this Email Reprints

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