Banker unrest threatens Credit Suisse, Deutsche Bank turnarounds

[FRANKFURT] Investors, regulators and employees hailed John Cryan and Tidjane Thiam as leaders who could turn around Europe's two biggest investment banks. Less than a year into their jobs, the joy is gone.

The chief executive officers of Deutsche Bank AG and Credit Suisse Group AG are squeezed between investors pushing them to boost profitability and employees demoralized by job cuts, lower pay and their bosses' blunt criticism. Shares for both banks are down more than 30 per cent this year, touching their lowest prices in decades.

The two men took over with mandates to tackle costly debt- trading businesses, outdated technology and weak controls that helped cause the mounting legal bills eating into their capital. Since then, a market slowdown has led some investors to question whether the plans go far enough, while others warn that cutting expenses too deeply will plunge the firms further into crisis by squelching the motivation of key earners.

"In the revenue environment we've got today, the need to go further on costs is almost inevitable," said Barrington Pitt Miller, an analyst with Janus Capital Group, one of Deutsche Bank's 50-biggest shareholders.

"But let's face it, we're not very far into these plans, and we need to see the banks do what they said they would." Morale at Deutsche Bank was already on the decline when Mr Cryan, 55, replaced co-CEO Anshu Jain in July.

An internal survey found employee commitment had fallen in June from a year earlier. Both he and Mr Thiam, 53, who joined Credit Suisse in June, have alienated investment bankers and traders with job cuts, lower bonuses and criticism of excessive pay, according to current and former executives at the two companies who asked not to be identified discussing internal matters.

Deutsche Bank faces a potential brain drain, especially among young high performers who are applying for jobs at banks they previously wouldn't have considered, according to one executive.

The company's plan to rebalance compensation by cutting bonuses while raising salaries for some employees is also discouraging some senior staff, the person said. Several veteran bankers have started leaving the office early because they no longer have the same incentive to work harder, according to the person.

Michael Golden, a spokesman for Deutsche Bank, said the company isn't having any trouble retaining or attracting employees.

"Voluntary attrition rates in our investment-banking businesses are markedly better than or in line with those of recent years, which speaks to the commitment and loyalty of our employees," Mr Golden said.

At Credit Suisse, some top bankers and traders have already left, and others are grumbling that Mr Thiam, a former CEO of British insurer Prudential Plc, doesn't understand their businesses or care enough about them. Even those traders whose jobs aren't at risk say the mood in the global markets division is depressed.

Surrounded by consultants and focused on figuring out the bank's long-term goals, the one-time McKinsey & Co partner didn't seem as concerned with trading risk as his predecessor, Brady Dougan, according to a former executive familiar with the situation.

At meetings with senior managers in the months before he laid out his October strategy, Mr Thiam rarely probed them about their holdings as Mr Dougan did, the person said.

Frustration turned to anger this year when Mr Thiam revealed Credit Suisse had lost almost US$1 billion on credit wagers. The CEO said traders had amassed some of the bets unbeknownst to him and his team.

That was hard to believe, according to former employees. Chief Risk Officer Joachim Oechslin circulates a regular report to top executives about the bank's holdings and the losses they could cause, one of them said.

Christoph Meier, a spokesman for Credit Suisse, said the Zurich-based bank was focused on being a top wealth manager, right-sizing its investment-banking business and becoming more profitable.

"The benefits of these changes will flow to our shareholders in the coming years," he wrote in an e-mail.

Both CEOs have voiced uncustomary criticism of their banks. Mr Cryan, a British citizen who had been chairman of the audit committee of Deutsche Bank's supervisory board, has derided excessive pay, "antiquated" information-technology systems and "unacceptable" legal expenses.

Although he has spent much of his career working alongside investment bankers, he said in November that he doesn't "fully empathize with anyone who says they turn up to work and work harder because they can be paid a little bit more."

Mr Thiam, a native of the Ivory Coast, also has been critical of investment bankers' pay and has said employees should accept that compensation can go down as well as up. He wants to get rid of risky positions as quickly as possible to protect the wealth- management businesses, whose clients may get spooked by more bad news, according to a person familiar with his thinking.

"The environment does seem to be starting to get people down," said Ben Kumar, who helps manage about £10 billion (S$19.25 billion) at London-based Seven Investment Management, Deutsche Bank's 30th biggest shareholder.

"You're left with some guys who are scared about their jobs and getting paid less. Are those the guys who are going to build your business up?" Still, Mr Kumar said, both Mr Cryan, a former UBS Group AG chief financial officer, and Mr Thiam have shown they're effective at running businesses.

"Part of the reason you bring someone new in is to have them deal with these challenging events," said Mr Kumar. "I'm not sure there's anyone where people would have said 'I'm glad he's in charge, he's absolutely nailed this.' When times are tough, they're tough for everyone."

While Mr Cryan acknowledges that his tone may have come as a shock, he says his management team is trying to shift attention from "tidying up the bank" to motivating employees. "We need to provide a return to shareholders, we need to build out the capital of the bank, but we need to remain competitive and make sure our people are motivated to serve our clients," he said last month at a conference in Frankfurt.

Spokesmen for both banks said their CEOs wouldn't comment for this story.

For Mr Cryan and Mr Thiam, the difficult task of reshaping banks with declining earnings was compounded by a barrage of bad news. Deutsche Bank's inability to clearly communicate that it could pay coupons on its riskiest debt and a resulting surge in costs to insure its bonds contributed to lost revenue in the first quarter, Mr Cryan said at a conference in London last month.

Mr Thiam, blindsided by illiquid trading positions that will probably spark a first-quarter loss, pledged deeper cost cuts at Credit Suisse last month.

One big investor who sold his stake in Credit Suisse said he was unhappy management didn't take ownership of the trading losses and hasn't prioritized profitability over an expansion in Asia given slowing global growth. Others say uncertainty over when Deutsche Bank will make money again is a key concern for that company's shares.

Investment banks are contending with a slump in revenue as lower energy prices and slowing growth in China have clients shying away from trading or issuing securities to raise funds. In Europe, banks also are contending with record low interest rates and bond buying by central banks, which has further reduced profitability.

Credit Suisse's stock has fallen the furthest of the 10 biggest investment banks this year, while Deutsche Bank has the lowest price-to-book value of the group, indicating that it's worth less than investors should expect to receive if the firm liquidated its assets.

"Both of them are in the same environment and have similar issues in terms of the lack of capital generation over the last couple of years," said Martin Moeller, head of equity portfolio management at Union Bancaire Privee in Geneva. Credit Suisse's reaction to the market downturn by cutting assets and staff further is less of a strategic consideration and "more an indication that revenue of the business is looking really bad," he said.

Similar pressures are mounting for Mr Cryan. "Deutsche Bank is likely to need a fresh cull of businesses, costs and assets that are no longer sustainable in this harsher operating environment," analysts at Barclays Plc wrote in a March 31 note.

JPMorgan Chase & Co analysts said last week they are also looking for updated cost targets when Deutsche Bank reports first-quarter earnings April 28.

While Deutsche Bank probably will make more progress reducing costs, a weak revenue environment for all European investment banks means it and Credit Suisse, which reports results May 10, will struggle to show the benefits of savings, according to analysts at Royal Bank of Canada.

Davide Marchesin, a fund manager at GAM Holding in Lugano, Switzerland, said cost cuts won't make investment banks more attractive. He sold his shares in Credit Suisse when it became clear that markets had entered a downturn.

"This kind of business needs top-line growth," said Mr Marchesin, who helps manage a US$1 billion fund. "This is a people-driven business. You're not just cutting fat, you're cutting the muscle and the earnings power of your company."

Still, some investors remain critical of how the bank allocates resources. Swiss fund managers quizzed Credit Suisse Chairman Urs Rohner last month on the distribution of profit between employee bonuses and shareholders, even after the bank cut its bonus pool 11 per cent for 2015, according to people familiar with the matter who asked not to be named as the meeting was private.

While Mr Cryan's comments have rattled some employees, others were grateful he identified the bank's problems so clearly, according to a labor representative at the company.

Regulators and lawmakers in Deutsche Bank's home country also support Mr Cryan. German banking supervisor Bafin views his focus on technology systems as long overdue, while an adviser to Chancellor Angela Merkel welcomes the transparency he has brought to the company.

The adviser, who spoke on condition of anonymity, said Germany needs Deutsche Bank to offer the services it can and that he is looking for signs in the second or third quarter that the bank can pull off its turnaround.

Investors also want to see evidence the banks can deliver on their promises.

"Directness and honesty are a refreshing change," said Eddie Perkin, chief equity investment officer for Boston-based Eaton Vance Corp, which managed US$315.1 billion at the end of March and is Credit Suisse's 15th-biggest shareholder.

"Investors in investment banks have been disappointed for a very, very long time. Equity investors have become cynical about announcements regarding restructuring, strategy changes and financial targets. They are in the show-me stage."

BLOOMBERG