Deutsche Bank's nightmare decade is gone, but not yet forgotten

On the day before one of the biggest margin calls in history, Deutsche Bank AG chief Christian Sewing joined an urgent meeting with a not-unfamiliar message: there was a problem, and billions of dollars were at stake.

But as executives on the late-March call briefed him on the bank’s exposure to Archegos, this time it wasn’t all bad news. Risk managers had been concerned by the family office’s rapid growth for some time, and had been collecting additional collateral. And the firm’s traders stood ready to quickly offload the slumping assets. So as Arche­gos’s collapse slammed rivals with more than $10 billion of losses, Deutsche Bank walked away wit­h­out a scratch, reporting its highe­st profit in seven years. It was enough to stun longti­me observers of the firm, which has spent the past decade-and-a-half stum­bling from one crisis to the next.

The escape added to a growing sense that Sewing may finally be moving Germany’s largest bank past its dysfunction of the last decade. “What they pulled off is quite impressive in the last couple of years,” said Matthew Fine, a portfolio manager at Third Avenue Management who started investing in Deutsche Bank shares after Sewing was appointed CEO in 2018.

Halfway through the CEO’s radical four-year restructuring, the perennial sick man of European finance appears to be on the mend. Instead of collapsing under bad loans, Deutsche Bank succ­essfully rode a trading wave that’s buoyed investment banks globally. To be sure, for a bank that lost money in five of the past six years and wh­ose shares remain 87 per cent below their peak, the bar to success is low and blunders remain an ever-present possibility. Sewing’s efforts have gott­en a boost from factors outside his control, such as the global market rally and extensive governm­ent guarantees that kept defaults at bay during the pandemic.

At home, he’s confronted the reality that in order to make money in an overbanked country with negative interest rates, he needs to raise fees and slash jobs, even at the risk of upsetting clients and unions. Above all, however, the former risk manager has made progress dealing with internal issues that had undermined his predecessors. He ended the divisional infighting that Sewing once called “Deutsche Bank’s disease,” and he addressed risk lapses that had caused the bank, over and over again, to shoot itself in the foot.

Archegos wasn’t the first blowup that Deutsche Bank sidestepped under Sewing. The bank last year avoided taking a potentially damaging financial and reputational hit from the collapse of payments firm Wirecard AG, having cut its exposure as doubts about the company’s business grew. It also hasn’t taken a direct hit from Greensill Capital, the supply-chain finance firm whose demise forced Credit Suisse to liquidate a $10 billion group of funds.

But it hadn’t lent as aggress­ively and its arrangement with Archegos allowed it to ask for more collateral to back up what looked like an increasingly imbalanced house of cards. The German bank had decided two years earlier to exit the business with hedge funds and family offices and was in the process of transferring its relations­hips to BNP Paribas SA. That gave Ashley Wilson, the head of the unit, and risk chief Stuart Lewis even more reason to keep things in check. The bank, which was conducting daily analyses of Archegos’s holdings, had noticed already in February that concentration risk was rising. In early March, it started to request more collateral, the people said, asking for anonymity discussing internal information. By Wednesday, March 24, when Lewis explained the situation to Sewing in that phone call, he told the CEO that the bank’s internal models were pointing to relatively minor potential losses. When it became clear on Friday that rivals were cutting their lifelines and getting out, Lewis got on a 20-minute call with his team, and the bank decided to liquidate. The firm’s traders sold most of the positions that Friday to multiple buyers including Marshall Wace, one of Europe’s largest hedge fund managers. The bank used direct sales, aiming to avoid spooking the markets. Within a few days, it recovered all of its money and even had some collateral left.

When the world stepped up scrutiny of the industry in the wake of the 2008 financial crisis, Deutsche Bank ended up footing the biggest legal bill of any European bank, spending over $19.4 billion on fines and settlements. Its lost decade stood out even in a post-crisis period that was tough for many European lenders. Among the 25 biggest banks in the world, it was the only one to have a net loss over the past 10 years, while many rivals racked up over $100 billion of profits. Inside the bank, many still worry that the next accident is just around the corner. Still, the change is palpable in the twin towers in central Frankfurt that represent the beating heart of Deutsche Bank.