Deutsche Bank raid pulls CEO Sewing deeper into 'vicious circle'

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It was a day for optimism amid the exotic trees and plants in Frankfurt’s botanical garden. Deutsche Bank CEO Christian Sewing was there to give the annual pep talk to his top executives.

The good cheer didn’t last long. The morning after, on Thursday, many were confronted by a line of police cars outside their headquarters. There and at five other locations, 170 officers were looking for signs of possible money laundering, with the raids continuing the next day.

And so it goes for what was once one of the world’s dominant financial institutions. Sewing, the bank’s fourth CEO since 2015, is trapped in the same feedback loop of negative news, rising funding costs and declining revenue that foiled his predecessor, John Cryan.

Even after months of relentless travel and endless meetings with staff and clients, the 48-year-old Deutsche Bank lifer has been unable to break out of what Chief Financial Officer James von Moltke called a “ vicious circle.”

“Just when you thought Deutsche Bank had left its legal troubles behind it, there’s more,” said Markus Riesselmann, an analyst with Independent Research who has a sell recommendation on the stock. “Investors really want to be able to focus on the bank’s operating business, so this noise around them is quite unhelpful for the mood.”

Germany’s largest lender has long struggled to work through legal issues relating to past misdeeds and Cryan called settling litigation risks an important achievement. But new cases have cropped up since Sewing took over: its role in a scandal around dirty money at Danske Bank and now accusations it didn’t report evidence of money-laundering contained in a batch of documents leaked to the media in 2016, known as Panama Papers. Deutsche Bank said it’s cooperating with authorities in this latest investigation.

The latest developments are unlikely to threaten Sewing’s position just yet; the bank’s largest investors who responded to questions from Bloomberg all said before Thursday that they back him.

But they’re likely to fuel speculation and instability among senior executives. Sewing has already replaced two members of the management board, former Chief Operating Officer Kim Hammonds and the head of asset management, Nicolas Moreau; Chief Regulatory Officer Sylvie Matherat may be the next to go, people familiar with the matter have said.

“I don’t think this will hurt Sewing too much,” said Ingo Frommen, an analyst with LBBW who recommends holding Deutsche Bank shares. “It looks like the scene is being set for a management shake-up and Sylvie Matherat could well leave as part of that, even if she didn’t bear any operational responsibility.”

Stefan Mueller, CEO of DGWA, an investment advisory boutique based in Frankfurt, said Supervisory Board Chairman Paul Achleitner may be at risk as well. Questions about Achleitner were last raised in April and May when he engineered the defenestration of Cryan though several shareholders have said that Sewing has turned out to be a good choice, according to people briefed on their thinking.

The markets reflect the doubts every day. The shares have dropped almost 25 percent since Sewing took over while the cost of insuring against default through derivatives called credit default swaps has risen to the highest level in two years.

Sewing has been reassuring regulators including the Federal Reserve that Deutsche Bank is serious about improving internal controls to prevent crimes, as well as its management of capital to ensure stability. Within hours of the raid, the CEO had lunch in Frankfurt with Randal Quarles, the Fed’s vice chairman for supervision. The meeting had been scheduled for some time and was unrelated to the raid, a Fed spokesman said.

Sewing has asked for patience from shareholders until the end of 2019 to show his strategy, centered around job cuts and redeploying capital from unprofitable business lines into more stable ones like transaction banking and asset management, can work. But he’s also said privately that he may have to review his strategy before that time if it becomes clear that it’s not going in the right direction, according to a person familiar with this thinking.

“The raids are bad for the sentiment around the firm,” Frommen said. “One hundred seventy officers, police cars parked in front of your building, these are the images that Deutsche Bank wanted to avoid ever seeing again.”

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