German giants tell divergent stories; European banks' U.S. units under pressure

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A tale of two banks

Deutsche Bank “remains on track to hit its financial targets this year despite the disruption” of the coronavirus, although that has “left it racing to speed up redundancies to achieve a key pledge on job cuts,” CFO James von Moltke told the Financial Times. “Speaking on the first anniversary of the German lender’s historic strategic overhaul, von Moltke acknowledged that the economic fallout from Covid-19 had made the turnround at Deutsche more difficult but was defiant on the troubled lender’s progress.”

“Our core strategic decisions have been vindicated, we have delivered on all of our promises . . . [and are] on track to deliver on the targets that we set for 2020,” he said.

But “a few relatively happy months does not make for a positive outlook,” a skeptical FT comments. “It is hard to see how the bank can hit its cost savings target, despite management assurances, given that restructuring efforts were paused during the pandemic lockdown. The bank appears to have taken a far from conservative approach to provisioning for prospective loan losses — it has set aside a fraction of the amount peers did. And its original plan and profit projection gave it little scope for setbacks, let alone a global economic crash. Second-quarter results later this month will be telling.”

Things aren’t as hopeful at Commerzbank, Germany’s second largest bank, which announced Friday that both its CEO and chairman have “submitted their resignations as the bank faces pressure from shareholder Cerberus Capital Management for a deep overhaul due to persistent poor performance.”

The Commerzbank logo sits illuminated on an ATM sign outside a branch near the bank's headquarters in Frankfurt, Germany, on June 29, 2020.
The Commerzbank logo sits illuminated on an ATM sign outside a branch near the bank's headquarters in Frankfurt, Germany, on June 29, 2020.

“Even if we made strategic progress, the financial performance of the bank has been and is unsatisfactory. And as CEO I bear the responsibility for that,” CEO Martin Zielke said. Chairman Stefan Schmittmann said “he shared responsibility for Commerzbank’s failure to convince markets that its overhaul, which included job cuts, was enough.”

Last month Cerberus called for “significant change at the supervisory board, the management board and the company’s strategic plan” to stop a “downward spiral” at the bank.

Missing

The worldwide search for Wirecard’s former chief operating officer Jan Marsalek continues. “Wirecard doesn’t know where Mr. Marsalek is now,” the Wall Street Journal reports. “He hasn’t been in contact with the company since it suspended his employment on June 18, the day Wirecard revealed the $2 billion hole in its balance sheet. Remaining executives believe he has gone on the run. German authorities are also looking for him.”

Philippine authorities “say they believe immigration documents showing he entered the country last month may have been forged,” the Journal reports. “Records appeared to show Mr. Marsalek arrived in the Philippines on June 23 and departed the following day. But investigators have reason to believe the logs were faked by immigration or airport personnel. The record of his arrival was canceled shortly after it was entered, and Mr. Marsalek wasn’t visible in surveillance footage from the airport.” Wall Street Journal, Financial Times

“Wirecard’s core business in Europe and the Americas has been lossmaking for years, casting doubt on the economic substance of the parts of the company not directly affected by its accounting scandal,” the FT reports. “Wirecard’s internal numbers reveal that the operating performance of its core business — mainly payments processing in Europe and issuing credit cards in Europe and North America — was far worse than previously known. The figures show that those core activities have also become increasingly lossmaking in recent years, despite accounting for half of the company’s reported revenue and almost two-thirds of the transaction volume.”

Wall Street Journal

Stay alert

“Financial institutions still need to conduct due diligence and monitor transactions for hemp-related businesses,” according to expanded guidance from the Treasury Department’s Financial Crimes Enforcement Network. “Banks and other institutions need to tailor anti-money-laundering programs to reflect the specific risks associated with customers that produce hemp, a variety of the cannabis plant that is often used for its fiber, as they would with any other customer,” FinCEN said.

“The guidance highlights the risk and challenge that financial institutions can face in dealing with customers involved in the expanding cannabis markets. Hemp was legalized nationally in 2018, but a federal ban on marijuana remains and some states don’t allow possession of any kind of cannabis, including hemp.”

Alternative lender

Apollo Global Management “is launching a big new credit operation as the buyout giant dives deeper into the rapidly expanding pool of direct lending. The New York firm is creating a $12 billion platform focused on providing companies with loans of around $1 billion, Apollo officials said. Abu Dhabi state fund Mubadala Investment Co. is the lead backer of the venture, whose firepower Apollo plans to augment with additional capital from other investors.”

“By launching a dedicated business that will be able to hold most of the loans it makes, Apollo hopes to more aggressively target larger borrowers—both private-equity backed and those that aren’t—that can’t get the financing they need from a bank.”

Racism’s cost

Raphael Bostic, the president of the Federal Reserve Bank of Atlanta and the first Black person to head one of the Fed’s 12 regional banks, “is shining a light on how economic and social upheaval have changed how the central bank talks and thinks about racial and economic inequality. In an essay published after two intense weeks of national unrest following the killing of George Floyd while in police custody, Mr. Bostic framed injustice in moral and economic terms.”

Systemic racism is a yoke that drags on the American economy,” he wrote on the bank’s website.

Financial Times

Stressed out

“The Federal Reserve expects European banks to post the sharpest losses in key sectors hit by the pandemic, adding further pressure on their U.S. operations which already have mixed shareholder support. The latest round of the Fed’s annual stress tests predict that HSBC and Santander will have the biggest loss rates of any large bank in the U.S. market across credit cards and consumer lending. Credit Suisse and Barclays post the highest loan loss rates in two other categories: commercial real estate and commercial loans. The tests also show that Deutsche Bank is still expected to burn through capital faster than any of the other 32 financial institutions” it stress-tested.

“European banks have long had a troubled history in the U.S., growing aggressively from the late 1990s before pulling back after sizable losses.”

New normal?

“Zoom etiquette classes, digital job shadowing and online scavenger hunts await the thousands of students who begin Wall Street’s first year of virtual internships on Monday. Goldman Sachs, Citigroup and JPMorgan Chase all welcome their summer cohorts this week and will seek to capture the essence of one of Wall Street’s oldest rites of passage — in a world where interns cannot step foot in their offices.”

New York Times

Paper or plastic?

“Cash was already being edged out in many countries as urban consumers paid increasingly with apps and cards for even the smallest purchases. But the coronavirus is accelerating a shift toward a cashless future, raising new calculations for merchants and enriching the digital payments industry.”

Quotable

“The problem is that the U.S. banks are stronger and know their home market better. You should be more involved in areas when you have history and expertise. Any European banks still running operations where they don’t have a strong advantage, that is a business they shouldn’t be in.” — David Herro, vice chairman of Harris Associates, a big investor in European banks, discussing the poor performance of European banks’ U.S. subsidiaries.

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Deutsche Bank AML Wirecard Raphael Bostic Stress tests
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