If you had to pick the moment when European banking reached the point of no return, which would you choose? The July day in 2012 when Bob Diamond resigned as Barclays’s chief executive officer amid the Libor rigging scandal? Or the fall morning later that year when UBS announced it was pulling out of fixed income and firing 10,000 employees? How about Sept. 12, 2010, when Basel III’s raft of costly capital requirements started upending the economics of global finance?
All signature events, to be sure. But try May 21, 2015. That’s when Deutsche Bank stockholders filed into the dome-shaped Festhalle arena in Frankfurt to take part in one of the most venerated and, let’s be honest, boring rituals in corporate life: casting a vote on management’s strategy and performance. It wasn’t dull this time. Almost 40 percent of the bank’s investors gave co-CEOs Anshu Jain and Jürgen Fitschen a big thumbs down. While winning six out of 10 votes is a landslide in politics, it’s a crushing blow at a publicly traded company. By the end of June, Jain was out and Fitschen had agreed to leave the company by May of this year.
Investors are running out of patience with European bank chieftains, and no wonder.
Since the fall of Lehman Brothers in September 2008, eight of Europe’s biggest banks have announced layoffs adding up to about 100,000 employees, paid $63 billion in legal penalties, and lost $420 billion in market value.
In 2015, Deutsche Bank lost a record €6.8 billion ($7.6 billion). In mid-February the industry suffered an epic selloff as subzero interest rates, China’s slowdown, the oil crash, and looming regulatory and litigation costs triggered an outbreak of fear not seen since the fall of 2008.
Just last year new CEOs took over at Barclays, Credit Suisse, Deutsche Bank, and Standard Chartered. Now they have to find a way to prosper in a marketplace that’s being reshaped simultaneously by strict new capital regulations and myriad financial technology startups that don’t have to abide by them.
While American banks appear to have turned the corner since that gut-churning autumn nearly eight years ago, European institutions are girding yet again for another round of restructuring. So much so that analysts in London call them “building sites,” Bloomberg Markets magazine reports in its forthcoming issue. Credit Suisse’s new CEO, Tidjane Thiam, is “right-sizing” the investment bank and pushing for a 61 percent jump in pretax income from his international wealth management unit over the next two years. At Barclays, Jes Staley wasted no time cutting 1,200 investment banking jobs and closing offices in Asia and Australia after taking charge in December. Meanwhile, John Cryan, the British executive who replaced the India-born Jain, is pursuing an unprecedented overhaul of Deutsche Bank’s entire information technology infrastructure to shore up shaky risk-management systems.
No event crystallizes the forces at work in European finance more than Jain’s exit and Cryan’s entry. Jain, 53, a fixed-income maestro who excelled on the trading floor and the sales side, did as much as anyone to build Deutsche into an investment banking powerhouse with operations in 70 countries. No surprise, then, that when it came time for him to draft a five-year plan to confront the forces buffeting the institution, he balked at a fundamental reorganization along the lines, say, of what Sergio Ermotti did at UBS in 2012. In April 2015, Jain and Fitschen vowed to divest Deutsche’s shares in the German retail lender Postbank and retreat from more than a half-dozen countries as part of a €3.5 billion cost-cutting plan.
Even so, as Jain put it, Deutsche Bank would “remain global … remain universal.” He said in a Bloomberg TV interview at the time, “There was quite a bit of speculation that we might have done something even grander, even more radical. It really became a case of not altering the core DNA.”
That wasn’t what investors wanted to hear, and Deutsche shares skidded almost 10 percent over the next week. Analysts griped about the bank’s soaring litigation costs. That month, Deutsche agreed to pay $2.5 billion in penalties to U.S. and U.K. authorities for its role in the Libor rate rigging. (No current or former member of the bank’s management board was implicated.)
But something deeper was at work, too. European banks aren’t going through a stormy phase that will eventually clear and permit them to claim a new golden age.The industry is undergoing a metamorphosis that will demand a thorough and radical alteration of its core operating model.
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