JOHN CRYAN has spent almost three years on the thankless task of revitalising Germany’s biggest bank. Deutsche Bank’s shares fetch around €11 ($13.50) each. That is less than half their price when he became joint chief executive in July 2015 (he became sole boss 11 months later) and an eighth of the peak in Deutsche’s pre-crisis pomp (see chart). Paul Achleitner, the chairman of Deutsche’s supervisory board—perhaps sharing investors’ impatience, perhaps to shore up his own position—has reportedly sounded out possible replacements for Mr Cryan.
The two men are also said to disagree over the future of Deutsche’s investment bank, with Mr Cryan wanting to shrink it further and Mr Achleitner not. But Mr Cryan insisted in a memo to staff on March 28th that there was “no difference of opinion” over the bank’s strategy: the supervisory board (that’s you, Mr Achleitner) had given its seal of approval, too. Laid out a year ago, the strategy involved raising €8bn in equity, selling part of the asset-management division and cutting costs, as well as merging Deutsche’s two retail banks—the posh “blue” brand and the dowdier Postbank, bought from the German post office in 2008-10, which Mr Cryan had formerly hoped to sell. The corporate and investment bank would place more emphasis on serving companies (eg, merger advice, managing payments and hedging against shifts in interest and exchange rates) and become more selective in serving institutions such as hedge funds.
Some of the items on this list have been ticked off. The new shares were sold almost at once. Last month the sale of 22% of the asset manager, renamed DWS, raised €1.4bn. Deutsche’s balance-sheet looks solid. At the end of 2017 its ratio of equity to risk-weighted assets, a key gauge of capital strength, was a robust 14%.
But the rest, and restoring profitability, will take time. Mr Cryan’s target of a 10% return on tangible equity looks far off. Last year Deutsche reported an annual net loss of €497m—its third net loss in a row—after December’s reform of American corporate-tax law turned a pre-tax profit of €1.3bn red. Like other banks, Deutsche has suffered from eerily quiet trading: its fixed-income revenues plunged by 29% in the year to the fourth quarter. (Greater volatility in markets will help on this score.)
Last month James von Moltke, its chief financial officer, said that a strong euro and higher financing costs would set it back by €450m in the first quarter of 2018, compared with a year earlier. Delays in selling businesses mean that operating costs this year could be €1bn higher than planned.
There are bright spots, for example in merger advice. And the nomination on April 4th of John Thain, ex-head of Merrill Lynch, to Deutsche’s supervisory board should add expertise. But whoever is in charge, Deutsche needs to do more on costs and revenues. Last year expenses were an unhealthy 93% of income, and pay jumped from 40% of revenue to 46%. The management board went without bonuses but other bankers were paid €2bn-plus, after a deep cut in 2016.
Quite probably, Mr Cryan is on the right track—at any rate, the least bad track available. In a recent report Morgan Stanley, a bank, and Oliver Wyman, a firm of consultants, forecast that banks’ global revenues from corporate clients would grow by 4% a year in the next three years, against just 2% from institutional businesses. Even so, Morgan Stanley’s analysts expect Deutsche to keep losing market share.
America’s leading banks look better placed. They will gain from America’s corporate-tax cuts and faster loan growth, and from its rising short-term interest rates. They are in stronger shape than European banks, having reorganised themselves more quickly after the financial crisis. In the past five years their share of European investment-banking revenues has risen by eight percentage points.
Kian Abouhossein, of J.P. Morgan, argues that Deutsche may be wise to focus on serving European companies in their home continent and abroad, and cut back in America, where he estimates it made a return on equity of only 2% last year. Coalition, a research firm, says that Deutsche ranked second in European investment-banking revenues last year, but only eighth in America and joint fifth in Asia.
Such a retreat would bring Deutsche closer to its roots as corporate Germany’s house bank. But Deutsche cannot live by German business alone. Making money in a land of 1,600 banks is hard, even when you are the biggest, and especially with interest rates at rock-bottom.
Twenty years ago Deutsche had stakes in several German companies. Now those firms, like their counterparts elsewhere, can pick and choose among the world’s banks. Too big for Germany, dissatisfied with Europe alone, but trailing behind the American giants: you wouldn’t start from here. It’s a pity that Mr Cryan, or anyone daft enough to covet his job, will have to.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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