«Deutsche bank: a traditional Hausbank for European corporates, with a global network and no exotic risks»
Fabrizio Campelli, member of the management board at Deutsche bank responsible for the investment bank and the corporate bank
di Isabella Bufacchi
8' di lettura
Fabrizio Campelli, member of the management board at Deutsche bank responsible for the investment bank and the corporate bank, in this exclusive interview outlines the new business model and the transformation launched by ceo Christian Sewing, the most important restructuring in the history of the first German private bank: a leading European Hausbank with a global network, with a strong focus on costs and risk discipline, balanced and stable sources of profit and revenues.
We are closing another year of the pandemic and Deutsche Bank’s performance in the first nine months of 2021 exceeded expectations. Where is Deutsche Bank in its transformation process?
These latest results show the progress we have made and the acceleration in achieving our goals. The transformation was announced in 2019 a few months before the pandemic. Since then, banks have been unexpectedly hit by this crisis. Still, Deutsche Bank managed to execute its restructuring plan with a very strong focus on costs and on our strengths, risk and balance sheet discipline. And we had the courage to exit non-strategic businesses. Our clients remained loyal during this period of transformation, and many of them actually appreciate the clarity of our new strategy.
The latest rating upgrades by Fitch, Moody's and Standard & Poor's also helped: clients who turned away after our downgrades in past years have now come back. Interest rates in the meantime have gone somewhat up from their historic lows, at least in some regions, and this means that margins will improve. Global GDP is also growing and all this helps the investment banking and corporate banking businesses that I’m responsible for now.
The Investment Bank's contribution to revenues and profits is growing, even if DB is expecting a “normalization”. Investment banking should have been less central in your transformation plans, shouldn't it?
With our transformation, we communicated the ambition to be a leading European bank with a global network. To ensure our ability to support our clients for the long haul we need balance sheet strength and more stable sources of profit compared to the past. That means that the bank will further diversify its revenues and its profits while continuing to focus on the balance between its businesses. The market environment in 2020 and 2021 saw dislocation and volatility that naturally favoured the Investment Bank, but we expect this trend to normalise in favor of businesses such as the Corporate Bank, Private Bank and asset management. This strategy is clear and remains unchanged.
Nevertheless, in our investment banking business, 2020 and 2021 have been very good years. In investment banking we have had quarterly revenues between 1.7-1.8 billion euros up to 2 billion euros in 2018-2019 but in Q1 2021 they rose above 3 billion euros... And while we expect the environment to normalize we are confident that our Investment Bank will be able to reach our 8.5 billion-euro revenue ambition in 2022. Nevertheless, this year we should match or slightly exceed the 9.3 billion euros of Investment Bank revenues we booked in 2020.
Is DB taking less risk, like lower market and credit risks, by the reduction of its investment banking business?
We want to be a Hausbank for European companies, large and small, with access to products and services in a global network. It is not our business model anymore to provide all products and all services to all clients, but we are focussing on businesses where we compete to win.
The Investment Bank is aligned to this strategy: we are focusing on traditional markets and corporate finance, M&A, capital markets, fixed income and loans. We’ve moved out of the more “exotic” capital-intensive businesses across all markets, we’ve moved out of equity trading, we’ve reduced complexity. We have relatively fewer hedge fund clients and more institutional and traditional corporate clients. Risk density has come down.
At the same time we aim to provide an adequate return on equity to our shareholders. Today, the allocation of our RWA (risk weighted assets) is more balanced. RWAs for the Investment Bank for example have remained largely stable from 2019 to now: they have grown slightly because of regulatory inflation and the maintenance of the models that measure operational risk but, other than these effects, by and large they have remained unchanged.
This means that we have been able to generate higher revenues without taking additional risk. We are focused on primary equity, primary and secondary fixed income, and foreign exchange.
The Capital Release Unit (CRU) is an in-house vehicle and not an off-balance sheet bad bank: has it helped DB to reduce risks?
I would not call it a bad bank, because it is not used to sell assets at heavily discounted prices, like the bad banks we saw after the Global Financial Crisis. It is a vehicle to exit products and close non-strategic exposures, as we did with secondary equity market products.
But there’s more. The strategy we announced in 2019 involved transformation costs of more than 8 billion euros and massive investments, like spending 13 billion euros on IT systems. The Capital Release Unit helped free up part of the capital needed to finance the transformation without asking the markets for a capital raise. We were able to reduce RWAs faster than expected and at market prices better than expected.
I would also add that in 2020 and 2021 there was a lot of focus on VaR, value-at-risk: we had a very good performance and our fixed income activities grew while keeping market risk stable. On credit risk, we continued to lend to clients who needed financing during the pandemic. But we remained cautious and, thanks to a very strong risk management, we were not hit by unmanageable shocks.
As for non-performing loans: so far the pandemic has not caused NPLs to explode in German banks' balance sheets, but the Bundesbank and the SSM/ECB urge caution.
The pandemic is an unprecedented crisis. It is difficult to estimate the medium- and long-term impacts. But we have a very solid loan book with subdued exposure to sectors most hit by the pandemic, and our credit loss provisions have stayed far below industry average over the past two years. We have been cautious and continue to be cautious. We welcome the recommendations of the regulators. Of course economies have also benefitted from significant public stimulus and stabilisation programmes.
The biggest risk for banks which have a big consumer credit exposure (to which DB has limited exposure in Italy and Germany) would be a sharp increase in unemployment.
The contribution of the Corporate Bank, post-transformation, is expected to increase: is this the case?
In corporate banking there is a real acceleration to focus more on the more stable businesses. We have made a very strong investment in growth areas like payments and inside the core bank there is more collaboration amongst the different business areas.
Obviously, we faced the headwinds of negative interest rates but we were able to largely offset those by measures like deposit repricing and business growth. We expect interest rate headwinds to fade next year which means that our business growth should finally become visible in the top line. In addition, cost discipline has been very tight. The Corporate Bank’s pre-tax profits in the first nine months of 2021 doubled.
And the importance of Italy for Deutsche Bank, is it going up or down? Is Italy more or less strategic?
Next year DB will celebrate 45 years in Italy. Our commitment to the country is historical. Italy remains an anchor of our European and global strategy. It is our most important EU market after Germany. Italy is also the mirror of what Deutsche Bank wants to become in Europe: the global Hausbank with European roots and a global network.
In Italy, we decided to focus more on a “bank for entrepreneurs” approach. The reduction of branches in Italy is part of a European trend, which has been accelerated by the pandemic and by customers becoming more digital, and we are certainly not the only European bank to do so. I was in Italy recently, talking to our customers, from multinationals with Italian offices to family-owned businesses. Germany and Italy are our two top markets because German and Italian companies have such a great focus on exports.
What about shareholders? Are they disappointed in your stock performance?
True, DB is still valued relatively low compared to other banks, but this creates an opportunity for investors – if you compare our share price development against the European banking index, and we have outperformed most of our peers since the announcement of our strategy in 2019. Investors are asking us for continuity on the trajectory we have indicated and that we meet the 2022 targets, such as 8% RoTE and 70% cost-to-income ratio. Capital Group recently increased its stake in DB to 5.2%, and the ratings agencies referred to our progress in implementing our strategy when they upgraded our ratings. We see all of this as a sign of confidence and trust in our strategy and our new business model that focuses on revenue and profit growth, but based on cost discipline and tight balance sheet and risk management.
The target on costs has been softened since the launch of the transformation, hasn't it?
Originally, when launching the transformation in 2019 we identified targets for absolute costs and for our cost-income ratio. Then the strategy started to perform better than expected. Revenues have risen more than expected while there have been unforeseen external cost factors. In order not to limit growth in revenues we decided to adjust our approach in summer 2021, when we decided to focus on the relative measure. Our originally communicated target of a 70% cost-to-income ratio in 2022 is unchanged, as is our discipline on costs.
You joined DB in 2004. You worked at DB in the glory years but also in very bad times. And now CEO Christian Sewing has announced the end of an era with the exit of Supervisory Board Chairman Paul Achleitner, replaced by Dutchman Alexander Wynaendts, and Chief Risk Officer Stuart Lewis replaced by Olivier Vigneron. Why is an era “over”? And what new era is coming?
I’ve been at DB for 18 years. A few years ago, DB had reached a point where change was needed: a change to be managed with courage and determination, focusing on our strengths and remaining a strongly European bank. This is what our CEO Christian Sewing did by launching our transformation program in 2019: a new strategy and a new courageous business model with a strong leadership team, that is now more aligned than it has ever been in the past.
Deutsche Bank is and will remain a very European bank. These two appointments represent new, strongly European leaders. The new era is starting not only in DB but also in the European banking system. The post-pandemic recovery and climate change are two major challenges that lie ahead of us and that cannot be tackled and financed by banks and governments alone: the contribution and role of the European capital markets are fundamental. They will enable Europe to compete on a global scale -- and in the European capital markets, Deutsche Bank wants to be a leader.