As the credit crunch continues to bite, Rich Herman, global head of institutional clients at Deutsche Bank, tells Geraldine Lambe that banks and clients alike have to morph to fit the new landscape. But the crisis brings with it opportunities as well as challenges.

Deutsche Bank has fared pretty well in the market turmoil that has seen some European and US competitors suffer almost catastrophic subprime write-downs. Deutsche, by contrast, came through 2007 with a more manageable bill of €1.6bn.

No bank is an island, however. As the effects of the subprime crisis continue to ripple outwards, Deutsche Bank announced further anticipated mark-downs of about €2.5bn for the first quarter of 2008 and, as The Banker went to press, was preparing to sell off $20bn of leveraged debt.

Under pressure

Despite Deutsche Bank’s relatively robust performance, the bank is also under pressure from German activist investors, who are calling for the investment bank to be split from its other operations and for it to launch a ‘de-Americanisation’ process without delay, before the bank becomes more deeply embroiled in the US mess.

Whether or not it is likely that such demands will be met, they are another manifestation of the sea-change that the industry is going through in the wake of the credit crisis.

Rich Herman, global head of Deutsche Bank’s institutional client group with responsibility for coverage of the bank’s investing clients across asset classes, says that every member of the financial community is changing to meet the demands of a less benign environment.

He says that hedge funds, for example, which have been a mainstay of investment banks’ trading and prime brokerage income in the past few years, are morphing to fit the new financial landscape.

One change is the return of the macro fund. “Big, heavy macro funds went out of fashion as more and more specialist hedge funds emerged [in the early part of this decade],” says Mr Herman. “But as markets have been buffeted during the past nine months or so, specialist strategies have fared less well than macro funds that can profit from whichever asset class is most out-of-joint.

“In markets such as these, it makes sense – for diversification purposes – for funds to become larger and more multi-strategy,” he adds.

Will banks have to change the way they provide services to clients in turn? “As markets change, investment banks have to change with them,” says Mr Herman.

He adds: “We are focused on continuing the build-up of cross-asset communication and co-ordination that [hedge] funds need and providing cross-asset class liquidity.”

Ongoing integration

In this respect, Mr Herman says that he will continue the integration begun in 2006 by his predecessor, Jim Turley (who is taking a sabbatical for the remainder of the year) – the first person at Deutsche Bank to be responsible for both equities and debt from a sales perspective.

In practice, that will mean making good on promises to break down product silos, which, despite banks’ (and many fund managers’) best efforts, have proved difficult to dismantle.

Mr Herman was appointed to his position in February from his previous role of European debt sales and, before that, head of rates structuring and trading. His move was just one in a raft of senior management changes, all of which were appointments of new members to the global markets division’s executive committee.

New responsibilities

At the same time, Colin Fan and Baoz Weinstein took on the roles of co-heads of global credit trading – Mr Fan moving from head of equities in Asia and Mr Weinstein from head of global credit trading in North America and Europe.

Fred Brettschneider was appointed head of global markets in the Americas, from a role as head of the institutional client group in the Americas, which he will retain in addition to his new responsibilities. Finally, Bill Broeksmit rejoined Deutsche Bank after a stint as an independent consultant, taking on the newly created position as the head of portfolio risk optimisation.

Are the appointments symptomatic of Deutsche repositioning its people and services in order to meet the new demands of clients?

No, says Mr Herman, just part of the usual ebb and flow of bank staff. That said, he acknowledges that the ability of people in client-facing roles to bring cross-product knowledge and add experience of other geographies to the mix is particularly helpful in today’s jittery markets.

Mr Herman says that part of the bank’s greater co-ordination efforts will address client needs – to understand the geographical dimension of market behaviour that is getting ever more complex. If globalisation has demanded a more holistic view of markets, he says, then the current crisis has made that requirement more urgent.

Global understanding

With the world’s economies pulling apart in a way that has never really happened before, and economies and events moving at different speeds on different continents, the ability to understand how this affects global businesses and global portfolios is a prime differentiator.

Mr Herman says: “Our clients have to manage asset and liability issues in the context of very different financial and economic environments around the globe. The US is in the greatest distress; Europe is going through similar balance sheet deterioration but has a marginally better economic outlook; and Asia has been affected but is still going strong.”

He adds: “Our ability to bring together the bank’s coverage of the Americas, Europe and Asia in conjunction with cross-product capability is more crucial than ever before.”

Ripple effect

In what some see as the final indignity for a banking industry that has taken a big hit to its credibility, hedge funds have even begun to question the credit quality of their prime brokers in the wake of Bear Stearns’ collapse, fearing the loss of assets held by a prime broker if that broker gets into difficulty. Mr Herman says: “The credit quality of prime brokers has become an issue in a way that it wasn’t before. However, it is really just one aspect of the current crisis, which is one of confidence.”

Importance of clients

Mr Herman adds: “The key question is: Can you focus on your clients? Clients need to know that their counterparties are focused on them, not wrapped up in their own risk-management issues.” Yet it is not all doom and gloom in the banking sector, there are plenty of areas that offer room for growth, particularly in Asia.

Mr Herman says: “Every client base in Asia is growing rapidly – from retail customers through to sovereign wealth funds. We are well placed in markets such as India and China to take advantage of that growth.”

If, as the saying goes, a good trader can make money whether markets are going up or down, then a good bank can make money when times are tough: a customer’s problem is a banker’s opportunity. And there are plenty of opportunities in the solution business, says Mr Herman.

“Outside of the subprime crisis, clients have had a lot of regulatory changes to contend with, including the impact on their businesses of Markets in Financial Instruments Directive (MiFID), Solvency II and Basel II. These present challenges and opportunities in terms of risk management and asset allocation where we can offer effective solutions.”

Pension activity

In the pension fund sector, the buy-out market is creating interesting opportunities. As more insurance companies buy out pension fund portfolios, the new entrants have brought a much more proactive management style to the sector, and this means liability management as well as asset diversification.

“Previously, the emphasis was on assets; now liability management is a much higher priority. New entrants are hedging out liabilities first,” says Mr Herman.

On the asset side, insurance companies have traditionally been relatively conservative about asset choices but are now considering a broader range of assets, especially now that many valuations have decreased to much more palatable levels.

“A lot of insurance companies are long cash and have pristine balance sheets and portfolios; they are therefore well placed to reconsider their asset allocation,” says Mr Herman. “There are some very attractive opportunities right across the credit spectrum, for example, in areas such as senior unsecured bank debt and leveraged loans. And despite the current environment, there are even interesting opportunities in the CDO [collateralised debt obligation] market.”

CAREER HISTORY

2008: Appointed global head of the institutional client group at Deutsche Bank

2007: Appointed European head of debt sales at Deutsche Bank

2003: Moved back to Deutsche Bank in Europe as head of European rates, and was then promoted to head of rates structuring

2000: Moved to Deutsche Bank’s Japan operations as head of OTC derivatives trading

1996: Joined Deutsche Bank in London as an option trader after working in the New York office

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