Latest developments at Deutsche Bank would appear to offer incontrovertible evidence that the next chapter will be dominated as much if not more than the one that ended with the exit of the former CEO by drastic cost-cutting and a return to its roots.
Taken in the round, a new CEO with a background in risk and audit and former responsibility for the Private and Commercial Bank; a new co-president with a background in operations and human resources; and the departure of the former co-head of the Corporate and Investment bank who had been pushing to invest more in the troubled unit can mean just one thing.
And that’s gravitating away from the cost and headcount-heavy corporate and investment bank in favour of retail and commercial banking. Achieving this will be no trivial matter: Deutsche Bank’s culture for almost a quarter of a century has been that of an aggressive, international Wall Street trading powerhouse defined by domination of global derivatives markets.
Times have changed. More to the point, the difference between that legacy and building a retail and commercial bank for tomorrow could not be starker. As a starting point it will mean a shift towards the domestic German market, which in turn will likely lead to the group morphing and adopting a more domestic German culture.
New CEO Christian Sewing doesn’t have much room for manoeuvre: cuts to CIB business lines and headcount are really the only viable path to reducing the cost base and increasing returns. “The new CEO’s options are very limited. It’s very probable that the group is going to be much more focused on commercial and retail banking in Germany. Expanding this and making it more efficient will be a priority. But given the ultra-competitive environment, the only way to achieve even that is to cut costs further,” said Sam Theodore, team leader for bank ratings at Scope.
Deutsche Bank’s 2017 cost/income ratio of 93.4% is a dramatic upside outlier relative to other German bank, and leading French banking groups for that matter, whose C/I ratios are clustered around the high 60s. Deutsche Bank’s CIB headcount of 41,349 at the end of 2017 accounted for 42% of group employees but perhaps more critically, the division generated close to 54% of group revenues. That’s what Sewing has at risk.
Taking just one comparison, 2017 headcount at HSBC’s Global Banking and Markets division was higher than Deutsche Bank’s CIB, at 45,725. But HSBC’s total equates to just 20% of group headcount and 29% of group net revenues. What this exemplifies is Deutsche Bank’s lack of business diversification.
“The main story for Deutsche Bank for some years to come is going to be how far and how fast they can cut costs. For the investment bank, drastic cost cuts are unavoidable. The key questions will be how much meat they are prepared to cut, what’s left at the end of the process, and what happens to the imperative to drive revenue growth while the bank is immersed in cost-cutting,” said Theodore.
To get the group in balance, the supervisory board has created a defensive executive formation on the management board that above all will seek to quell stakeholder criticism – including from key shareholders – that the right-sizing being conducted by John Cryan was going too slowly. In truth, Cryan became CEO at a very unpleasant moment in the history of Deutsche Bank, at a time when the cycle moved strongly against the bank’s business model and the tectonic shifts in banking were moving more quickly than the capacity of the bank to adapt.
The forensic analysis of the investment bank already in play and accelerated by new CEO Christian Sewing, and the dark undertones of his inaugural letter to colleagues will likely have left employees anxious, in particular staff in the CIB. A non-negotiable 2018 cost ceiling of EUR 23bn; eliminating bureaucracy and duplication; zero tolerance for missed cost and revenue targets; adapting the investment bank’s revenue, cost and capital structure; and pulling back from areas not sufficiently profitable leaves little room for interpretation.
“Revenue generation won’t be off the agenda; it’s more a question of what the most immediate goals are going to be. Deutsche Bank needs to come up a credible revenue proposition and business strategy, and a push to re-establish itself in the market on the terms it has set for itself. At the same time, it needs to create incentives to retain its intellectual capital and human talent. If the strategy moves against the investment bank, the first to leave will be the top talent,” Theodore said.
At the moment, Deutsche Bank says it aspires to be the leading client-centric global universal bank. The next descriptor is being written now. Being a leading corporate and investment bank demands a strong footprint in advisory, underwriting, trading, lending, transaction banking, trade finance, securities services and ancillary services. That takes not just a strong brand but a cadre of top talent and playmakers.
“It’s going to be much tougher for Deutsche Bank to retain and recruit key bankers in Europe given the likely direction of travel under the new CEO at a time when competition for that talent from US, UK, French and Swiss banks is very keen,” said Theodore.
European shares end higher on strong earnings, positive data
By Sagarika Jaisinghani and Ambar Warrick
(Reuters) – Euro zone shares rose on Friday, marking a third week of gains, as data showed factory activity in February jumped to a three-year high, while upbeat quarterly earnings boosted confidence in a broader economic recovery.
The euro zone index was up 0.9%, with strong earnings from companies such as Acciona and Hermes brewing some optimism over an eventual economic recovery.
The pan-European STOXX 600 index rose 0.5%, as regional factory activity was seen reaching a three-year high on strong demand for manufactured goods at home and overseas.
Another reading showed the euro zone’s current account surplus widened in December on a rise in trade surplus and a narrower deficit in secondary income.
Still, the STOXX 600 marked small gains for the week, having dropped for the past three sessions as investor concern grew over rising inflation and a rocky COVID-19 vaccine rollout.
But basic resources stocks outpaced their peers this week with a 7% jump, as improving industrial activity across the globe drove up commodity prices.
“This week’s slightly adverse price action has all the hallmarks of a loss of momentum temporarily and not a structural turn,” said Jeffrey Halley, senior market analyst at OANDA.
“There is not a major central bank in the world thinking about taking their foot off the monetary spigot, except perhaps China. (Markets) will remain awash in zero percent central bank money through all of 2021 (and) a lot of that will head to the equity market.”
Minutes of the European Central Bank’s January meeting, released on Thursday, showed policymakers expressed fresh concerns over the euro’s strength but appeared relaxed over the recent rise in government bond yields.
The bank’s relaxed stance was justified by the euro zone economy requiring continued monetary and fiscal support, as evidenced by a contraction in the bloc’s dominant services industry in February.
The STOXX 600 has rebounded more than 50% since crashing to multi-year lows in March 2020, with hopes of a global economic rebound this year sparking demand for sectors such as energy, mining, banks and industrial goods.
London’s FTSE 100 lagged regional bourses on Friday due to a slump in January retail sales and as the pound jumped to its highest against the dollar in nearly three years. [.L] [GBP/]
French carmaker Renault tumbled more than 4% after posting a record annual loss of 8 billion euros ($9.68 billion), while food group Danone and German insurer Allianz rose following upbeat trading forecasts.
(Reporting by Sagarika Jaisinghani in Bengaluru; Editing by Sriraj Kalluvila and Shailesh Kuber)
ECB plans closer scrutiny of bank boards
FRANKFURT (Reuters) – The European Central Bank plans to increase scrutiny of bank board directors and will take look more closely at diversity within management bodies, ECB supervisor Edouard Fernandez-Bollo said on Friday.
The ECB already examines the suitability of board candidates in a so-called fit and proper assessment, but rules across the 19 euro zone members vary, so the quality of these checks can be inconsistent.
The ECB plans to ask banks to undertake a suitability assessment before making appointments, and they will put greater emphasis on the candidates’ previous positions and the bank’s specific needs, Fernandez-Bollo said in a speech.
The supervisor also plans more detailed rules on how it will reassess board members once new information emerges, particularly in case of breaches related to anti-money laundering and financing of terrorism, Fernandez-Bollo added.
Fernandez-Bollo did not talk about enforcing diversity quotas, but he argued that diversity, including diversity in gender, backgrounds and experiences, improves efficiency and was thus crucial.
“Supervisors will consider furthermore all of the diversity-related aspects that are most relevant to enhancing the individual and collective leadership of boards,” he said.
“Diversity within a management body is therefore crucial … there is a lot of room for improvement in this area in European banks,” he said.
(Reporting by Balazs Koranyi, editing by Larry King)
Where are we with Open Banking, and should we be going further?
By Mitchel Lenson, Non-Executive Chairman, Exizent
Open Banking has the power to revolutionise the way we manage our money, but most (65%) consumers are still not aware of it, while many financial institutions continue to treat it as an obligation rather than an opportunity.
For Open Banking to truly reach its potential, consumers need to have more trust in its benefits. However, this will only happen if banks and other financial institutions start to embrace it, rather than simply accept it.
Covid-19 has proven to banks that digital banking and open finance innovation is not simply a ‘nice to have’. It is vital for their own survival. With so many challenger banks now coming into the market, many of whom have entirely digital models and therefore invest heavily in technology, banks are starting to become aware that if they don’t embrace it, they’ll get left behind.
So, fuelled by a mixture of competition and Covid-19, banks are starting to realise that Open Banking is not about giving away valuable data, but it is about collaborating with third party fintechs to explore the endless opportunities data sharing can bring – to all sides.
By making open finance easier for developers, banks can not only save time and money by improving their own services but help create useful solutions that add real value for their customers.
Open Banking for all?
There is one, yet untapped area of consumer finance that could be immeasurably improved by Open Banking, and that is estate administration.
Recent research from Which? found that many executors contend with delays, errors and poor knowledge from their banks during the probate process. Our own research shows that most legal professionals admit the process does not work as it should, and the time it takes to complete probate is unacceptable.
Like the Which? survey, we found that the main issue is the administration involved, with most legal professionals saying that the time it takes for financial institutions to get back to them with the information they need is the main cause of delays.
Given that the system is not working for consumers, something clearly needs to be done. The good news is that the technology and data is already available – we just need to harness it to create a better system.
That is why we are developing the first ever platform to connect executors, legal professionals, and financial institutions to create a better, quicker, and more secure probate experience for everyone.
Our first release of the platform – a bespoke cloud-based solution to enable legal services firms to integrate directly with financial institutions making information gathering and processing more straightforward – was released in 2020. We are now building on that foundation to accelerate our development work with financial institutions to deliver additional value for all sides.
We also see huge potential in working with banks to utilise the digital financial infrastructure, powered by Open Banking, to improve things even further. But there is one, fairly sizeable issue – currently, Open Banking consent ceases at the point of death.
Is it time for legislative change?
Open Banking is not as open as is should be for those who can give consent, so we are certainly some way off from Open Banking for the deceased. However, the more that banks acknowledge Open Banking and its potential and are prepared to collaborate with third party fintechs to develop better experiences for consumers, the more likely we are to get to a point where we can tap into that potential to improve things for the bereaved.
Many of the problems – highlighted by Which? – that consumers face when managing someone’s estate could be reduced significantly if open finance continued to apply to the deceased.
Open Banking provides a huge opportunity to speed-up and reduce friction for loved ones faced at some of the hardest moments of their lives, and there is a strong argument here for the current position to be reviewed to enable better access to a deceased person’s assets.
With our current platform, we are showing how technology is playing an incredibly significant role in dealing with the complex, tangled process that is probate and the potential of open finance in radically enhancing what we are already doing cannot be understated.
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