(Bloomberg) — Deutsche Bank AG shares surged the most in more than two years as investors welcomed a management overhaul at Germanys biggest bank.
John Cryan, 54, a supervisory board member since 2013, was named the next chief executive officer in a surprise announcement Sunday. The British native will replace co-CEO AnshuJainat the end of the month and become sole CEO when Juergen Fitschen steps down next May.
The shakeup is the latest to sweep aside top management at one of Europes largest banks as firms grapple with stricter regulatory scrutiny and higher capital demands. Cryan will inherit a lender plagued by billions of euros in legal costs and questions about its revised strategy.Jain, 52, and Fitschen, 66, missed profit targets and presided over a lagging share performance.
With John Cryan as CEO, we think that Deutsche is transitioning from one of the least credible management teams in investors minds to one of the most highly regarded, Omar Fall, an analyst at Jefferies LLC in London, wrote in a note to clients. We do not foresee a dramatic change in strategy or capital raising, but market confidence on delivery should clearly increase.
The shares jumped as much as 8.2 percent, the biggest intraday advance since April 2013, and were up 4.8 percent at 28.94 euros by 4:28 p.m. in Frankfurt.
Deep Knowledge
Deutsche Banks stock had posted the worst performance among global peers during the co-CEOs tenure. The company is valued at about 40 billion euros ($45 billion), or about 65 percent of its tangible book, indicating its worth less than investors should expect to receive if the company liquidated its assets.
Cryan won investors respect by helping lead UBS Group AG back from the brink of collapse as chief financial officer during the credit crisis of the last decade. He became CFO in 2008, when the largest Swiss bank was reeling from record losses tied to the U.S. housing market.
Peter Kurer, a former chairman at UBS, said by e-mail that Cryan has a deep knowledge about what banks are and how they work, when calling him controlled, witty and cultivated.
UBS was in a big crisis and Cryan managed it well, said Dirk Becker, a Frankfurt-based analyst at Kepler Cheuvreux. His communication was also very good, winning points with investors, he said.
Highly Regarded
Cryan left UBS in 2011 and joined Temasek Holdings Pte, the Singapore state-owned investment company, as president for Europe, where he worked for two years. He joined Deutsche Banks supervisory board in 2013 and has served on the audit and risk committees.
Jainand Fitschen faced pressure to persuade investors that a strategic plan announced in April would succeed after Germanys biggest bank failed to meet previous targets amid mounting legal costs. The top managers received the lowest approval from shareholders in at least a decade at last months annual meeting.
With the previous CEOs having missed targets, investors need to see evidence on cost management, JPMorgan Chase & Co. analysts led by Kian Abouhossein wrote in a note to clients on Monday. Cryan has a proven track record in turning UBS around as its CFO and is highly regarded by the market, they wrote.
Sudden Turnabout
Lawmakers in German Chancellor Angela Merkels coalition and the opposition also applauded the management change, with Hans Michelbach, a legislator in the Christian Democratic-led bloc, calling it a new phase in the banks fortunes.
The turnabout was sudden forJain, who rose to prominence building Deutsche Bank into Europes biggest investment bank and a leader in debt trading. He overcame criticism of his investment-banking pedigree and a lack of fluency in German to join with Fitschen in replacing CEO Josef Ackermann in 2012.
Jainand Fitschen struggled to adapt to new rules that made some activities less profitable, while dealing with a barrage of legal issues.
The bank was fined $2.5 billion in April by regulators in the U.S. and the U.K. for manipulating interest-rate benchmarks. The penalty was the biggest yet that Deutsche Bank had to pay for misconduct and comes on top of 7.1 billion euros the lender spent on litigation in the previous three years.
Potential Fines
It still faces potential fines related to foreign exchange, mortgage- and asset-backed securities and precious metals dealings, and is under investigation for alleged U.S. sanctions violations, according to its annual report. Deutsche Bank is also conducting an internal probe into possible money laundering by Russian clients that may involve about $6 billion of transactions over more than four years, people with knowledge of the situation said last week.
Deutsche Banks model is badly broken, said Simon Johnson, an economist at the Massachusetts Institute of Technology. They have too little equity capital, a flawed culture, and an appalling record on risk management.
At the annual shareholder meeting last month,Jainacknowledged Deutsche Bank failed to keep two key promises: reining in costs and resolving litigation issues.
On Sunday, he emphasized the positive, saying that during the period he and Fitschen ran the bank they boosted capital, cut risk and invested in technology, control and compliance.
It has been 20 years this month since I came to work at Deutsche Bank and it has been an extraordinary time,Jain, a native of India, said in the statement.
New Strategy
Over the past month,Jaincame to the conclusion that the bank needed a five-year commitment from the CEOs to deliver on the strategic overhaul and consequently decided a change of leadership would be better for the firm, said a person with knowledge of the situation. Fitschen didnt want to continue leading the firm and agreed to resign withJain, said the person, who asked not to be identified because the discussions are private.
As part of the new strategy, Deutsche Bank will target a return on tangible equity of 10 percent by 2020 — less than the 12 percent return on equity it had planned for 2016. In the first quarter, the profitability measure stood at 3.1 percent.
Their decision to step down early demonstrates impressively their attitude of putting the banks interests ahead of their own, supervisory board Chairman Paul Achleitner said in the statement.
Logical Change
Jains departure reflects a wider shift at Europes biggest banks away from a reliance on fixed-income trading, which helped fuel profits before the financial crisis and which has come under the heaviest regulation in the ensuing years. CEOs with trading backgrounds at UBS, Barclays Plc and Credit Suisse Group AG have given way to successors with backgrounds in banking or insurance.
Fitschen, who was raised in northern Germany, joined Deutsche Bank in 1987 and is the longest-serving employee on its management board.
The two men wont get paid for the remainder of their contracts, which were to run until 2017, according to people with knowledge of the matter. Each was awarded 6.66 million euros of compensation for 2014.
Its a logical change given the current environment, said Steve Schwarzman, the co-founder of Blackstone Group LP, in an interview. Its difficult for anyone to gain the confidence of investors, regulators and politicians.
