Deutsche Bank Aktiengesellschaft (DBK) Earnings Call Transcript & Summary

Welcome and thank you for joining us today. I'm delighted to welcome Mark Fedorcik from Deutsche Bank for this fireside chat. Mark is the Head of the Investment Bank and has spent his entire career at Deutsche. So he's seen much of the journey so far. And before we kick off, please, can I remind you to respond to the audience poll, which should be at the top right of your screen. [Operator Instructions] The audience poll has got 6 questions on key share price drivers and we'll review the responses after our chat. So without further ado, let's get going.

Mark, so the first question I've got for you is now being more than 2 years into Deutsche Bank's new strategy, what are your key takeaways from the transformation? And what has changed in the Investment Bank? And then also, what have been the greatest challenges?

Sure, Amit. It's a pleasure to join you from New York. Thanks for having me. As someone that's been here for quite some time, but also taking over the Investment Bank over 2 years ago, I think there's 3 standout changes that I've witnessed which has been different than in years past, but it's also led to our performance over the last now 1.5 years as well. And those 3 quite simply are: Number one, we have stability of a management team. Do not underestimate having the same management team consistently driving the message quarter after quarter. We've now had that for 2 years. The second thing we've had is a very clear strategy. There's no longer ambiguity, which businesses you're in, which geographies you're exiting. That clear strategy matters equally to clients and employees. And having a clear strategy on the Investment Bank means a lot because then it's all about going forward. And then the third piece, which is also different and I'm sure we'll talk about is just client intensity. The amount of calls we make to clients, how we drive those calls, how we measure them, I'll talk about it, but it's really those 3 things: stability of management team, having a clear and consistent strategy and the client intensity are really the 3 biggest factors that we've seen really the last 2 years than the prior 5, 6, 7 or 8. To answer your question on challenges, it's repeating, right? It's quarter after quarter using a poor analogy of running the same play. Deutsche Bank is now, for the first time in quite some time, to run the same play quarter after quarter. And that's exactly what Ram Nayak is doing and myself in running the Investment Bank and building that consistency and credibility with not just employees but clients and shareholders.

And so the Investment Bank has been a large contributor to the group's outperformance this year. How do you expect your revenues to develop going forward? And can you give us an update on how Q3 has developed so far?

Sure. So stability of revenues is 1 of the 4 pillars that Ram and I talked about, revenues, cost capital and clients and being able to demonstrate stability of revenues. We generated, as a reminder, which everyone knows, EUR 9.3 billion of revenues last year in the Investment Bank. Not that it's a relevant data point, that was EUR 7 billion in '19. We will be in line with last year's revenues for the full year this year of EUR 9.3 billion, okay? To answer your question around Q3, not surprising to a lot of the folks in the fixed income markets, Q3 and July start off pretty muted for the markets in general. We saw a good pickup in activity in August, and we've seen it now in the first 2 weeks of September. We've also seen robust activity in many parts of our Financing businesses and our Origination & Advisory businesses. One comment that James von Moltke made back, our CFO, in June, we just talked about the run rate, what he saw, which we continue to reemphasize of EUR 2 billion to EUR 2.5 billion of revenues a quarter in the Investment Bank. Obviously, some seasonality can play when those quarters are and we reaffirm that.

And still on the topic of revenues. The sustainability of Deutsche Bank's revenues and especially the Investment Bank revenues have been a large focus. One point of concern at the beginning of the transformation have been how you can shrink the business footprint but at the same time, increase revenues. Why do you think the level of Investment Bank revenues can be sustained?

Well, you're absolutely right. We have reduced costs and we have also grown revenues from we started out. So I mean, the numbers speak for themselves. So now we're going to be 6 to 7 quarters of showing that we've been able to reduce costs in the Investment Bank and also grow and keep revenues flat, just to put it in perspective. In Q3 of 2019, which is when we announced our strategy, right, our noninterest expense line was EUR 1.57 billion. That's what we had. That's what our cost base was. In Q2, which we just reported, it went to EUR 1.35 billion, so down 15%. So as other banks are managing their costs, we took our cost base down 15%. At the same time, Amit, we took revenues up 45%. So I would answer a little differently. We've been able and what we've seen and Ram and I have seen is go deeper, right? You don't need to be in every perimeter of the world, be good and focused on segments of products and services and geographies and go deeper with those clients. We have a fantastic fixed income franchise. We have a fantastic financing businesses across commercial real estate, ABS. We have some really good industry groups, but go deeper with the ones you have. So I wouldn't think of it as shrinking, reduce costs, which we're very focused on, which we've done now based upon the numbers that we've reported and we've shown that we can now sustain revenues and grow them by going deeper with our client base and the segments we're focused on.

And then you've talked a lot about regaining market share. How is this progressing? And have you recently gained more share? And how do you plan to take further share from here and take share from your competitors?

Sure. So maybe we'll start with the 2 big pieces of the business within the Investment Bank, Fixed Income and then Origination & Advisory. So we'll talk about each of them. The answer is yes. we have grown market share back, and it's an important piece to look at. What we really care about is sustaining and growing revenues and cutting costs. Market share will follow and we have seen that. So let's start with Origination & Advisory first. From an actual revenue basis, reported, we have grown 6 quarters in a row of year-over-year revenues. I think that's a pretty good accomplishment. And at the same time, if you look at Dealogic, fee-based market share, year-to-date, we've grown market share versus last year for our global Origination & Advisory business. If you look at Fixed Income, for the past 4 quarters, our reported revenues have outperformed most of the pace of most of our selected peers, but also our market share in coalition for the first half of this year, we were #3. So we look at both. We have to look at revenues because that's ultimately driving return to shareholders, but also are we growing back some share and I agree with you, right? We want to continue to grow back some market share. I'll give you one example, right? ESG, one of the fastest-growing segments in the capital markets, okay? When you look at all of the fees paid to banks across investment grade, leveraged finance, SSAs, we had a 2.4% market share in '19 for all ESG products in the debt financing markets. That's over double. It's 5.1% year-to-date. One example of growing market share in one of the fastest-growing segments. And to answer your question how are we doing it, this is a little example of leveraged finance. It's an area of helping clients in ESG, which is one of the most underpenetrated markets, access the capital markets by bringing them to the market. So the answer is yes, we have grown back market share. We're equally proud of the revenues we've also performed.

And you mentioned, I mean, clients and within this, so you mentioned in the past, you see clients coming back under the new strategy. Is this trend continuing? And how much is the kind of cross-divisional collaboration across Deutsche are also supporting your clients?

Sure. So I think first, and maybe just to get a plug, the Moody's ratings upgrade I think is a nice external reaffirmation, which helps clients externally see the progression of the bank, okay? That isn't the reason of the client engagement. It's another affirmation and also helps clients see the progress we're making. But I would say there's 2 main reasons client engagement continues to accelerate. Number one, we're no longer talking about Deutsche Bank. We're not talking about us. We're talking about the clients and trying to help them, very different than what it was 2, 3, 4 years ago. It's a change in discussion. And the second, we measure on a weekly basis the number of client calls we make from senior MDs and directors to our clients. I look at it every week. The number of calls we're making and interactions is up over 25% versus last year. Track it every week. And that's self-fulfilling. So that's a mindset that's cultural. I would just say on that, Christian and James are the most client-focused individuals I've seen at Deutsche Bank in quite some time. And again, going back to my first point, that consistency of management. So I'd say, one, we're focused on clients, no longer talking about Deutsche Bank, and we track and see those numbers. I would also say within Fixed Income, we launched in Europe a new institutional coverage model using data and technology in terms of how do we interact with institutional clients in Europe on the fixed side and the feedback has been very strong so far. Your other question is around working with other parts of the bank. And the primary interactions, a lot of our corporate clients is going to be around the Corporate Bank. And I see it firsthand, these are clients of the bank, not of the Investment Bank, not of the Corporate Bank. And the ability to bring in cash management, trade finance, trust services, we do a new issue deal, foreign exchange deal contingent, that's the mindset. We've got some fantastic products across Fixed Income and the Corporate Bank and delivering those to the client isn't something we are striving to do. It's something we're integrating every day in our dialogues. And we've got a fantastic franchise, particularly in Europe around our Corporate Banking products and services, and I mentioned a few.

And just before we turn to the next question, just a reminder to our audience that if you're able to complete the audience response poll, which is on the top right of your screens, and at any time, feel free to send the question through which hopefully we'll get time to address at the end of the presentation. So the next question I've got for you, Mark, is with the global economy recovering, M&A is once again heading towards record levels. How is Deutsche positioned here? And how are you approaching M&A? And what progress have you made? And are you considering further investments for example, in ECM, given recent market activity. So maybe a few questions in one there.

I'll try to address them all. Thanks, Amit. First, when you talk about M&A, we're talking about helping clients on the buy side and the sell side, helping our clients from an M&A perspective. And you're absolutely right, we're heading to a record year of M&A volumes and fees in 2021. We expected this. Those are pent-up demand. Confidence has come back. Plenty of capital out there to help facilitate. We have a real opportunity to grow our M&A revenues. It was always the last piece of the penetration within our Origination & Advisory. It takes the longest time. It takes time. Deals take 1 to 2 years. It takes confidence. And we've done a number of factors and initiatives to help grow and set ourselves on pace for the next 2 to 3 years to grow our M&A revenues. The first was, you alluded to it, we've made some strategic hires. So individuals are in industry verticals who have deep industry knowledge, who have good relationships with the C-suite. We've done that in Europe and the U.S. in sectors like health care. We've done it in TMT, technology in particular, verticals in industrials and private equity coverage as well, just to name a few. So we'll continue to make selective investments in bringing people onto the platform that are complementary to us. The second is focusing on cross-border. We clearly have an advantage. We've got great resources throughout the continent in Europe that give us insights and access. So working with clients on cross-border. Third is private equity, right? It's a really long-standing deep relationships that we have at DB. Helping private equity on buy sides and on sell sides is a continuation of our strategy. And fourth is going deeper with the C-suite. So those 4 factors have continued to leave us where we're growing M&A revenues, and they'll be materially up, not surprising because the market is up, so you'll continue to see our revenues up. Our market share is relatively flat. But the number I care more about is the pending transactions, that number is up significantly more than it was last time and the way the market is trending. So with those 4 initiatives, I feel confident this is an area we will continue to grow from a revenue perspective. And one of the biggest focus is that I have with Origination & Advisory. On Equity Capital Markets, since you mentioned it, I think we've shown that our model works, right? Two years ago, we came out with a model. And the reason it's successful is because we have most of, if not all, the ingredients to be successful to help our clients access the capital markets for IPOs, for follow-ons, for SPACs, et cetera. And those are simply we have research. We have capital provided to them. We have industry bankers covering those clients. We have capital markets people in ECM, and we've made some hires in Equity Capital Markets over the past few weeks and months. And we have sector sales who talk to institutional accounts. And yes, we also have trading capabilities for execution. That isn't the primary focus. All of those ingredients allow us to play a role in IPOs, follow-ons and stacks, and the model has been successful. Our revenues are and will be up significantly year-over-year. And we have gained market share both in a SPAC included in IPOs and non-SPAC basis, and it will continue to be a focus of ours.

Okay. So maybe changing slightly. How are the cost reductions within the Investment Bank progressing? And how will you contribute to the overall group cost reduction?

Well, I'm glad you brought up costs. I mean it is part of the DNA here. And let me just start by saying that management structure, Ram Nayak, myself, everyone in the Investment Bank and at the senior management level views cost reduction as important as revenue production. Both of them drop to the bottom line, which accrue to shareholders. That's a mindset here. That's the journey we're on. And as Christian and James explained in the second quarter of this past year 2021, we've shifted our focus to our cost/income ratio of 70% for the group for next year. And we are focused on this, and that is what we'll continue to equally balance between revenue controls and costs. And I'll just say for the Investment Bank, as you know, our cost/income target for 2022 is 56%, which we're already in line with. So within the Investment Bank, Ram and I did a lot of things early in '19 and throughout '20 to position us by head count reductions in the front office, decommissioning of apps, workflow tools. We've done a lot to position ourselves to get to that cost/income ratio of 56% and keep that target in the Investment Bank for 2022. There's more work to be done. FIC reengineering will continue to bring more cost reduction, coupled with infrastructure costs over the next 1 year. So I'm going to leave you with 2 things. One, the management team views cost reduction as important as revenue generation, both benefit shareholders. And the second message is within the Investment Bank, we've done a lot of work to position ourselves to get to our target that helps the group's number of 70% for next year.

Got it. And then at your previous Investor Day, you talked about 4 key strategic priorities: to stabilize and grow revenues, reduce costs, increase client intensity as well as an efficient capital usage. Can you outline the progress made there, please?

So I'm glad you brought it up because that was -- it was important to lay those 4 out and get everyone in the Investment Bank think about revenues, costs, capital and clients. There's a fifth I'm going to talk about at the end in a moment. But that's what we're focused on. So we're all here to stabilize and grow revenues. And you've seen it now in 2020 and again in 2021, where we've done that and we'll continue to show that we've stabilized revenues. And as I said, we believe we'll be in line with all of last year's revenues. From a cost perspective, I talked about the cost reductions already of what we've accomplished so far. We will continue doing that by reducing cost on a quarterly basis, and we'll continue to try to do that into 2022. The last 2 are as important because it drives both client intensity I referenced. I mean our job is to call clients. And I always say, if you're not calling them someone else at your competitors' probably is. And that mindset of making more calls and more visits as things are opening up, we're seeing the numbers, as I referenced, up 25% versus last year, particularly with an Origination & Advisory. And that was a good number last year. We all try to do the first 3 by keeping a disciplined approach to capital, particularly on risk-weighted assets. And we've driven the performance last year in revenues of the EUR 9.3 billion and what we're going to do this year again by keeping growth RWA flat. When you exclude inflation, regulatory overlays, we've kept it flat, which means we're being more disciplined and efficient with the capital we have. And Ram Nayak and I look at that capital within the Investment Bank, and we can dynamically move it around to the best businesses that deliver the highest returns that fit our footprint. The fifth piece I want to mention is controls. We want to be a boring, recurring, stable Investment Bank, and I'd love to see the bank as well. And in order to do that, Amit, you have to have good controls. And people need to be thinking about that all the time. Obviously, KYC. Obviously, rep risk, thinking about transaction monitoring, right? That mindset of, "Okay, it's one thing to say, let's go after a client in revenues." That's another to say, "Hey, is this the right client of the firm? Have we done all the right things internally to make sure it's vetted?" That control feature is also equally important, which drives those first 4 and is parallel to those. And I'd say from Ram and myself, that's also another cultural change that we've continued to do. Controls matter because that will make us a boring, repeatable Investment Bank in sustaining those revenues.

Got it. And so maybe, changing tack again, in May, you hosted a sustainability deep dive reflecting the sustainability and more broadly ESG are an important part of Deutsche Bank's strategy. Can you elaborate on the recent progress made here in the Investment Bank? What role does ESG play for you overall and for your clients? I know you alluded to one example earlier on.

Sure. I'm glad you brought it up. And I encourage, if you have not seen the May Sustainability Investor Day that we hosted just a few months ago, I encourage you to do it. There was a lot of content and disclosure given out by different businesses. But you're absolutely right. It is ESG and sustainability is not just important for clients, it's equally important for employees. They care about it probably as much than -- we're doing it for both because we're passionate about it. And ESG within the Investment Bank is not just helping clients raise capital. I referenced the Dealogic market share data of 2.4% to 5.1%. That is an external validation that we are growing market share of helping clients raise capital and doing more of it. But it's more than that. It's helping advise them on their capital structures, their sustainability ratings. And going back to M&A, helping them advise them on how to evolve their business models over time. So the ESG approach within the Investment Bank clearly, one of the targets we set out back at the Investor Day was volume targets around financing, and we accelerated those from 25 to 23 and we're well on track to exceed those targets. Second, target was the one I mentioned, grow market share. We've exceeded the market share targets I outlined of growing up by 50 basis points. But I did want to leave you with -- it's a much broader discussion. It's around the capital structure, advising them on sustainability ratings, evolving their business model over time. It's one of the fastest-growing segments in the capital markets. I mentioned the sub-investment grade market is the most underpenetrated from clients accessing it. We continue to see that growing rapidly, which plays to our strength as well of helping clients in the sub-investment-grade space, both in U.S. and Europe access it. So we're very excited about it, and one you'll keep hearing more about it from us.

And on a similar topic, I mean, did the culture in the Investment Bank change with the new leadership team? And how do you foster diversity within the Investment Bank?

It's a journey you keep working at. I don't think any of us are going to say done by any means because we still have a lot more work not because we've done anything wrong, it's -- culture is something you keep working at every day. And going back to my opening comments, it's one we have to keep running the same play over and over and over. And that's been part of our success over the past now 2 years is the consistency. The 3 main elements of, I'd say, the cultural changes within the Investment Bank, and I've alluded to some and I'll go deeper on others, first is the client centricity and intensity. That is just a cultural element now of client-focused every day and bringing a lot of intensity to calling those clients. Number 2 is collaboration and overcommunication, words we hear all the time, okay? But when you start thinking that this is not your client, but the bank's client, you start thinking about why did I call the Corporate Bank? Should we do the trust services on that deal? Have I tried calling them on the cash management? Should I bring a deal contingent to that transaction? Overcollaboration and communication is the second cultural change that Ram and I have been bringing to the Investment Bank. It's not your client, it's the bank's client. Let's bring the full weight of the firm to it. Third and probably the most important because it leads to the best ideas and leads to the best energy is diversity, equity and inclusion. We will continue to focus on 3 main areas. One is, let's continue to recruit and bring more people into this bank that don't look like me, we're blank, black, Latino, gender diversity, bring more diverse individuals into this bank through recruiting, grad recruiting, lateral hiring. And we've seen good progress at our graduate level so far. We doubled the number of individuals who are black a year ago versus this year. So we will have a real focus on bringing in diverse individuals from recruiting. Second is development. You just can't bring diverse individuals into a bank and then hope they develop. So creating mechanisms at the VP level up to the MD, and we have a lot of them, to help them be successful and get exposure. And then third is run dialogue. Dialogue happens in many ways. I have a speaker series where I bring outside speakers in pretty much every month, diverse candidates, to talk about the challenges they see in their business, what we can learn from them. And we'll keep focusing on recruiting, development and the dialogue. And I'll tell you, again, this is something back to my first comment, you have to do it over and over and over. So the culture has come a long way. Ram and I, by no means, are resting on where we are, but it's about client intensity, overcollaboration and increasing diversity within the bank, and I've talked about the controls.

And so I guess, we've spoken a lot about what's been happening and what's currently happening. Maybe a question a bit more onto the future. So I guess what my question is, what's your thinking in terms of what comes next for the Investment Bank? And maybe we can even broaden it not only just for Deutsche Bank but also the broader IB landscape.

You may not like this answer, what comes next. I wanted to be boring and repeatable every quarter with sustainable revenues. And I'm not half-joking there. I mean what Ram and I are focused on is reducing cost and playing our role there, focusing on the perimeter that we've established 2 years ago around our revenue footprint, going deep with those clients,and doing it quarter after quarter. And of course, there'll be moments when you look at the perimeter a little bit and make some adjustments. Amit, it's really to become a boring, repeatable bank but we don't have surprises other than on the upside. And we're on our early parts of that journey, but by no means are we done yet.

Okay. I'm going to have to think about what I write about then. But very good. So just a reminder for the audience, if you want to complete the poll on the top right because we'll turn to that shortly. I will just check the responses. Okay. So we'll run through. The first question was what would cause you to become more positive on Deutsche Bank shares? And the options were: positive revenue surprises, greater cost savings, better asset quality or stronger capital/higher or dividend payout. [Voting]

The -- I mean, the predominant answer was positive revenue surprise with a few people responding on capital. But actually, nobody said greater cost savings or better asset quality for interest. Question two. What do you expect to be the biggest influence on Deutsche Bank's revenues in the coming 12 months? So here, the options were: volumes, pricing, policy rates or fee and commission. [Voting]

And the predominant answer here was the fee and commission income with some people stating volumes. But again, our policy rates was not seen as a key factor. Number three, how do you think about Deutsche Bank's cost development versus expectations? And here, the options were: likely to beat, likely to meet, likely to miss and I'm not sure. [Voting]

And actually, again, maybe this is not such a surprise, but the likely to beat came out on top, followed by likely to meet expectations. Question 4 was how do you see Deutsche Bank positioned on capital and dividends? The options were: Upside surprised when distributions resume from lower capital requirements. And then second was upside surprise from better earnings in future years. Third was downside surprise from RWA procyclicality. Fourth was downside surprise from weaker earnings. And fifth was a downside surprise from increasing reg requirements. [Voting]

And here, actually, the main answer was upside surprise from better earnings in future years. So it seems like there's some positive vibes. And the minority said downside surprise from weaker earnings. Question 5. How do you see Deutsche Bank positions on ESG? The options were: above average, below average, in line with average and fourthly, not sure, haven't taken an ESG view yet. [Voting]

And actually, nobody said below average. The answers were either in line with average, above average or not sure, haven't taken a view at this stage. And then question 6, which is a bit more Deutsche Bank-specific. Do you believe the improvement in the IB performance is sustainable? Option one, yes, as customers return to the group and funding costs remain better. Number two, yes, because the broader IB environment will remain favorable. Number three, no, because costs will begin to tick up whilst revenues normalize. And number four, no, because the group will find it harder to compete with U.S. banks in the future. [Voting]

So here a bit of a split response. So the 2 main answers were yes, as customers return to the group and funding costs remain better. But also, number four, no, because the group will find it harder to compete with U.S. banks in the future. And there was a minority that also said, yes, because the environment will remain favorable. So that was the poll. I don't know, Mark, if you've got any thoughts or comments on any of those responses.

The folks are a lot smarter than I am. So I'm not going to comment on any of that other than to reiterate, Amit, first, thank you for having me. I appreciate it. I really do want to reiterate really where I started, which goes back to what Ram and I and the whole Investment Bank are focused on. But don't underestimate the stability of our management team, having a clear strategy 2 years in a row now, and you overlay the client intensity with that. People take it for granted, but having those 2 things is allowing us to now run a recurring play over and over and you're seeing the results from the revenue side and the cost side that I referenced.

Okay. Thank you. It also looks as though we don't have any specific audience questions at this point in time or at least I've not received them. So I'd just like to say again, thank you very much, Mark, and enjoy the rest of this event and today. And thank you to our audience members as well for joining us for this presentation.

Thank you, Amit. Appreciate it. Thank you.