Deutsche Bank’s co-head of EMEA corporate and investment banking talks to Danielle Myles about the division’s reorganisation, how it is regaining market share and its ability to attract and retain top talent.
Deutsche Bank’s corporate and investment banking (CIB) operations make the German group a very different beast to its European competitors. While other universal banks have put CIB at the centre of their post-crisis restructures, slashing markets and underwriting operations knowing they could leverage the strength of their other businesses, Deutsche Bank faced a highly unusual predicament.
With a competitive German retail banking market and an asset management unit that will soon be partially floated, Deutsche Bank’s CIB is the core of its business. Indeed, it always has been: CEO John Cryan describes it as the hallmark of the bank since it was founded 147 years ago. Its original mandate was to facilitate trade relations by helping German firms expand overseas – the genesis of today’s global transaction banking (GTB) division – and its global franchise grew off the back of fixed income and currencies.
“If we are going to drive appropriate returns to our shareholders, we have to make CIB work,” says Alasdair Warren, co-head of CIB for Europe, the Middle East and Africa (EMEA) and head of EMEA corporate finance. “This business is the biggest part of the bank and it must thrive in its own right, without the support from other divisions as some other banks have done.”
Growth-driven restructure
Under Strategy 2020, its five-year restructuring plan announced in 2015, Deutsche Bank committed to materially reducing the number of CIB clients, exiting the likes of uncleared credit default swaps and high risk-weighted securities trading, and reducing CIB risk-weighted assets by €28bn. As corporate finance, GTB and markets generate the lion’s share of group revenue, these reductions are proportionally less than those at other firms – and less than many expected given the group’s legacy financial woes.
There has been a greater focus on synergies, automation and becoming a client centric – rather than product centric – institution. These changes were reinforced by a reorganisation announced in March 2017. Markets, corporate finance and GTB were combined under the CIB umbrella, admittedly just two years after markets had been spun out of the division and GTB brought in. Some dubbed the move a U-turn, but the CIB’s new leadership believe it makes business sense.
“The rationale for bringing those three units back together is their common set of clients, both corporate and institutional,” says Mr Warren. “If you deliver your advice and services to clients across the full product spectrum, you can deliver better solutions for clients and generate higher returns.” Customers that are common to all three CIB units create on average a return on equity two to three times higher than those doing business with just one unit.
Another change saw Marcus Schenck move from chief financial officer to co-head of CIB alongside Garth Ritchie, with the pair leading an unusually large CIB executive committee of some 24 people. What stops this being unwieldy is that the co-heads have shunned the usual business-based split of responsibilities. Instead, Mr Schenck takes the lead on clients and Mr Ritchie on platforms.
Mr Warren explains this set-up has forced a new way of thinking. “There’s a focus on lateral co-operation across each part of the client-facing businesses of CIB, and also on end-to-end co-operation and end-to-end processes,” he says. “The CIB executive committee isn’t just client-facing people, it also involves operations and technology. It’s not just about getting clients in the door, it’s also about delivering the best holistic solutions and optimising the way their business is processed.”
2017’s recovery
As a ‘new’ CIB, under new leadership and as a combined division, Deutsche Bank CIB has only been operating since mid-2017 but the early results are promising. Mr Warren says: “In four or five months there’s only so much progress you can make, but in terms of driving that philosophy, I think we have achieved more during that period than in all of 2016.”
That was a particularly tumultuous year for the bank. Following a €6.8bn loss in 2015 – restructuring and litigation costs were big contributors – it fared poorly in US stress tests, saw its share price hit a record low, was downgraded by rating agencies and the cost of insuring its subordinated debt soared. To cap it off, the US Department of Justice proposed it pay $14bn to settle crisis-era mortgage mis-selling claims (it eventually agreed to $7.2bn).
“It’s fair to say that the effects of 2016, particularly in the fourth quarter, were pretty distracting for clients and our people across all our businesses,” says Mr Warren, reflecting on 2017. “Given the risks and the fact the press and competition were questioning our stability, some of our clients reconsidered their options about who they chose to do business with.” For Deutsche, this compounded industry-wide pressure on trading revenues caused by low volatility, and transaction banking due to reduced global trade flows.
The bank’s foreign exchange, corporate rates and flow debt capital markets businesses bounced back relatively quickly, but winning back relationship-driven businesses such as advisory after a period of distress is more complicated (the bank’s €8bn capital raise in April 2017 helped).
“It takes a while to rebuild, but in 2017 in European corporate finance we have seen improvements in market share in every business line,” says Mr Warren. “Our visible pipeline of mergers and acquisitions [M&A] and equity capital markets business as we head into 2018 is better than at any point in the past two years.” In the real estate sector alone, it is advising on Unibail-Rodamco’s $24.7bn tie-up with Westfield, the largest ever listed real estate deal, and Hammerson’s £3.4bn ($4.57bn) proposed acquisition of Intu.
Investing for the future
After losing between one-quarter to one-third of its market share in corporate finance and markets over the past three years, Deutsche is moving past its legacy problems. Between January and October 2017 it resolved 13 of the 20 cases that made up 90% of its litigation risk, and the lay-offs of CIB client-facing roles required under the group-wide restructure are now complete. “We are no longer constrained by capital nor reputation,” says Mr Warren. “It’s all about where we choose to focus our investments in people, platforms and capability.”
The bank is pursuing growth across all three CIB units. In GTB it is investing in cash management, arguably the weakest strand of its transaction business and an area where it lags other transaction banks such as Citi. “If we make the right platform investments and we focus our people on the right clients, with the network and client franchise we have, we should be able to close that gap,” says Mr Warren.
The markets group is electrifying high-volume, low-touch trading, and automating internal processes such as onboarding. Four or five years ago Deutsche Bank was at the forefront of the move to electronic trading, but it is an area where others have since invested more heavily. “The great thing about technology is that the pace of change is so great, that if you focus and invest you can leapfrog them,” says Mr Warren.
Corporate finance revenues are closely tied to roles on sizeable M&A, as they create the prospect of not only an advisory fee but also being mandated on other parts of the transaction. “Clients put great value on our financing and risk management capabilities that go alongside our advisory business, and these have a multiplier effect on the fees we are able to generate from an individual deal,” says Mr Warren. “So the real question is how to get on more big M&A trades.”
People power
As advisory is a people-driven business, Deutsche Bank’s response has been to grow European-centric sectors such as industrials and consumer, and fill capability gaps. Notwithstanding the bank’s troubled few years, the CIB still attracts top talent. “There isn’t a single senior individual that I’ve wanted to hire from another bank that we haven’t been able to get this year,” says Mr Warren.
Its ability to retain senior staff also defies the fact that no CIB banker received a 2016 bonus. The attrition rate in 2017 among corporate finance directors and managing directors was 20% less than the previous year, something Mr Warren attributes partly to the leadership’s commitment to return to market-competitive compensation – both quantum and, within regulatory constraints, structure – in 2017. “Everyone has bought into the fact that John [Cryan], the management board, CIB heads and a number of other senior leaders, including myself, have all said the same thing throughout: that we intend to deliver on that promise,” he says.
He says another reason Deutsche’s bankers are staying put is that, contrary to the negative headlines, morale and team spirit within the CIB are good. “When you go through a very difficult period, like we did at the end of 2016, it has a tremendously galvanising effect. There was a strong sense of ‘if we stick together we can get through this’,” he says. “Now we have got past most of the historical issues, the common binding element is knowing we are the last globally relevant CIB from Europe and that we can beat the Americans.”
