Investors in Deutsche Bank are concerned that the criminal investigation into the suspected money laundering activities of the lender’s wealth management unit will make it harder for chief executive Christian Sewing to execute his crucial turnround agenda.
Two days of raids on Deutsche Bank’s Frankfurt headquarters on Thursday and Friday that included Mr Sewing’s office sent its share price to a new all-time low and increased the pressure on the chief executive as well as on Deutsche’s chief regulatory officer, Sylvie Matherat.
Since Mr Sewing was appointed in April, Deutsche’s share price has lost 30 per cent.
Prosecutors in Frankfurt suspect that Deutsche from 2013 to 2018 helped wealth management clients to transfer dubious funds into a Deutsche Bank vehicle based in an offshore tax haven without flagging potential money laundering to law enforcement authorities.
The criminal investigation was triggered by leaked documents on offshore tax havens, the so-called “Panama Papers”. Two Deutsche Bank managing directors and further unspecific employees are in the crosshairs of the investigation. The prosecutors stress that no member of the management board has been targeted.
The alleged misconduct involved a former Deutsche Bank subsidiary dubbed Regula Limited. It was based in Road Town on the British Virgin Islands, according to a person familiar with the matter. Regula has 900 clients and €311m in assets under management. It was part of Deutsche’s Global Trust Solutions operations which was sold to Bermuda-based lender NT Butterfield & Son in March 2018.
The sale was part of a programme dubbed “Protect, Transform, Grow” that kicked off in 2015 under Mr Sewing’s leadership as co-head of Deutsche’s private and commercial bank, the division that oversees wealth management. In 2015, Deutsche started to de-risk wealth management by dropping some clients, a person with knowledge of the matter told the Financial Times.
A top 10 investor in Deutsche Bank told the Financial Times that “nobody expects that there is a direct link between [Mr Sewing] and the alleged misconduct, but he will be busy making this point over the coming months”.
The investor added that its key concern was that the investigation might divert the chief executive’s attention from executing the turnround agenda. “Mr Sewing has one job to do and that is raising Deutsche’s revenue,” said the person.
Even before the raids hit Deutsche at the end of last week, analysts on average expected Mr Sewing would miss his promise to lift the lender’s return on tangible equity to above 4 per cent by 2019. On average, analysts forecast a return of just 2.5 per cent for next year.
A different asset manager holding a 0.5 per cent stake in Deutsche warned that the money laundering investigation was likely to drag on for a long time. “It will be a key agenda item for the bank’s management board and as such will divert some time and attention from the operative business,” the person said.
A second top 10 investor said that “[the investigation] cannot help revenue, and it cannot help morale”. At the same time, this person said he saw “zero risk” that the matter could distract Mr Sewing from implementing his agenda at Deutsche. “It’s always the nature of the CEO job that you have to multitask and deal with several issues at the same time,” they added.
A third top 10 shareholder also backed Mr Sewing, stressing he was not concerned the investigation might impair the chief executive’s focus on the operating business and praising the new management’s achievements so far.
Since his appointment as chief executive, Mr Sewing has cut 2,300 jobs and promised to axe another 5,000 by the end of next year. While the bank is on track to meet its 2018 cost-cutting targets, Mr Sewing in October asked investors for more patience on his efforts to raise revenue.
Mr Sewing acknowledged over the weekend to the Bild am Sonntag newspaper that the investigation was damaging Deutsche’s reputation. He stressed that he was not concerned that the probe might reach him personally as the bank “thoroughly investigated the Panama Papers”. Asked if he had made any mistakes, Mr Sewing said: “I am at peace with myself.”
An investigation into the Panama Papers by German financial regulator BaFin concluded in 2017 that no German bank had violated money laundering rules “significantly”.
Klaus Nieding, vice-president of the German Shareholders’ Protection Association and a longstanding critic of Deutsche Bank, lashed out at the criminal prosecutors.
“The intensity of the operation appears just disproportionate to me,” Mr Nieding — a capital markets lawyer — told the Financial Times, adding that the authorities seemed to “take a sledgehammer to crack a nut”.
Frankfurt’s criminal prosecutor on Friday night praised the lender’s co-operation in the investigation, stressing that “Deutsche Bank is fully co-operating and answering all queries unreservedly” and pointing to “very quick and very good progress” in investigating the suspected misconduct.