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New Brooms: Bank CEOs embark on clean up

The towers of company Deutsche Bank are seen in Frankfurt, Germany. AFP Photo/Daniel Roland

In 2015, new bank chief executives have been rather like buses. You wait ages while anger mounts over regulation of the service, then three turn up at once.In the space of seven months in 2015, a trio of the world’s biggest banks – Barclays, Deutsche Bank and Credit Suisse – all brought new leaders on board. These ‘new brooms’ face similar challenges in cleaning up their businesses: cutting costs, reshaping their investment banks, and dealing with a legacy of legal and regulatory transgressions.

But a new paper on ‘CEO turnover and Relative Performance Evaluation’, from the Journal Of Finance, suggests one metric is more likely to determine their fate: “bad [stock]market performance”.

Jes Staley, BarclaysJes Staley is a banker in a hurry. Since taking charge of Barclays on December 1, just seven weeks after his appointment was reported, he has already launched a strategic review, passed a Bank of England stress test, crossed the Atlantic a few times, and sold a couple of non-core businesses.

In some respects, the Boston-born former JPMorgan Chase executive has had three years to prepare for the job: the 58-year-old was one of two names on a shortlist to replace Bob Diamond in 2012 when the bank chose to make Antony Jenkins its chief executive instead.

Mr Staley, who joined Barclays after a few years at US hedge fund BlueMountain Capital, faces three main challenges.

First, to come up with a coherent strategy. Many investors see Barclays as a haphazard collection of businesses thrown together almost by chance: a British high street bank; an investment bank with strong US and UK roots; a global credit card operation; and an African unit.

Already, the new boss is reviewing whether to keep the African operation and is expected to announce more cutbacks in the investment bank, particularly in Asia, when he presents his strategy in early March.

Second, facing the regulatory challenges. Barclays has the toughest task of any bank in complying with the UK’s ringfencing law, which requires big lenders to hive off their retail banking operations from their riskier investment banks. It must also create a standalone holding company in the US that is likely to raise its capital requirements.

Finally, clearing the whiff of scandal hanging over Barclays. Only last month, it paid $150m to settle the latest investigation by US authorities – this time into its dark pool trading platform. And it still faces a UK criminal probe into fees paid to the Qatari investors that supported its 2008 capital raising.

A key test for Mr Staley will be to stay on the right side of John McFarlane, the gruff Scot who became the bank’s chairman this year and took full executive control after sacking Mr Jenkins in July.

Mr McFarlane told staff in July that he aimed to double the bank’s share price in three years. Since then, the shares have fallen by a fifth. Mr Staley, who will be paid as much £8.25m a year, has his work cut out. – Martin Arnold

John Cryan, Deutsche Bank

When the news broke in June that John Cryan, a former UBS banker, was to take the helm at Deutsche Bank, shares in the German lender jumped 8 per cent.

Since then, however, they have fallen sharply – and end the year trading on not much more than half of the group’s book value.

There are various reasons for the low valuation. Uncertainty over whether the bank will need to raise more capital – fuelled by a web of legal entanglements, as well as tightening regulatory requirements – is one. Another is Deutsche’s meagre return on equity, which was 0.4 per cent in 2012, 1.2 per cent in 2013, and 2.7 per cent in 2014.

With the bank on course for a big annual loss, this measure will not improve in 2015.

Mr Cryan has already spelt out his response. Deutsche will shore up its balance sheet by selling assets and withholding dividends, this year and next. It will seek to improve returns by improving efficiency: cutting 9,000 jobs; withdrawing from 10 countries; and overhauling its creaking IT-systems.

Former colleagues say Mr Cryan’s experience of restructuring UBS’s business in the depths of the financial crisis will stand him in good stead for the task.

“He’s ... very detail-orientated,” says one. “He has a lot of relevant experience for the analysis he is going to need to run. He won’t leave any stone unturned.”

One question, however, is whether Mr Cryan can cut costs and assets without harming Deutsche’s earnings power too severely. “The operative business is the alpha and omega,” says Ingo Speich, a portfolio manager at Union Investment, one of Deutsche’s top 20 shareholders. “They have to show investors that they can still earn money, even after they have reshaped the investment bank.”

At least the decision about how and where to cut is in Mr Cryan’s control. One of the factors making the veteran banker’s job so difficult is that another key task – resolving Deutsche’s array of legal woes, including an investigation into its Russian business – is largely not.

“The situation in Russia is the big unknown,” says Jon Peace, an analyst at Nomura. “Until they can convince investors that they don’t need to raise capital – which depends on their progress on litigation as well as deleveraging – the shares are unlikely to re-rate.” – James Shotter

Tidjane Thiam, Credit SuisseTidjane Thiam joined Credit Suisse in a blaze of glory. Reports of his appointment drove an 8 per cent rise in the bank’s intraday share price as investors bet that he was the man who would finally deal with Credit Suisse’s underperforming investment bank. They also hoped Mr Thiam would put an end to persistent questions about the Swiss bank’s capital adequacy, which dogged the tenure of his predecessor, Brady Dougan.

That was in March. But even though the former Prudential chief executive was not free to take up his role until late June, the bank’s share price remained buoyant: at around SFr26 it as up more than 15 per cent on its level before Mr Thiam’s appointment was announced.

He began his time in Zurich with a charm offensive, using interviews with the Financial Times and a Swiss newspaper in his very first week to outline the “ruthless” review of costs and profitability he would carry out.

He spent subsequent weeks doing the rounds with investors, canvassing them on the strategy they would like the bank to embark on. They liked what they heard from Mr Thiam: the shares approached the SFr28 mark in early August, their highest level in sixteen months.

But the mood music began to change in the run up to the October announcement date for his strategic review. Investors began to realise that a large capital raising was in the offing – more than SFr5bn according to a Goldman Sachs poll. In their conversations with Mr Thiam, it was also becoming increasingly clear that there was no ‘magic bullet’ to reinvigorate the bank.

Mr Thiam’s announcement ultimately confirmed both fears. Credit Suisse needs to raise SFr6.05bn in new capital, shed SFr30bn of non strategic assets, reallocate resources to high-growth Asia and list its Swiss private bank to take on domestic rivals. Shares in the bank fall back to the SFr21 mark, about 15 per cent below their opening level in 2015.

Investors will be looking for signs that Mr Thiam can turn things around in line with his new strategy for the coming years. Without them, the early share price reaction to Mr Thiam’s appointment may prove a brief triumph of hope over the bank’s reality.

 
A version of this article appeared in the print edition of The Daily Star on December 28, 2015, on page 16.

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