Deutsche Bank Aktiengesellschaft (DBK) Earnings Call Transcript & Summary

Okay. Good morning, and thank you all for joining us in person today. It is my pleasure to welcome everyone to our 12th Annual Global Financial Services Conference. My name is Mark Fedorcik. I'm Co-Head of the Investment Bank. And I'm proud to say I've been with this bank for 28 years. I'm pleased that we can also meet back in person at our beautiful One Deutsche Bank Center. So thank you for coming. We have 190 representatives attending over the next 3 days from 80 leading financial services firms. And in addition, we have over 150 participating investors as well. So thank you for coming out. Allow me to extend a warm welcome not just to all of you, but to the -- my Deutsche Bank colleagues. We have over 100 of you in attendance. And all the folks who are putting on this conference, thank you very much. Let me now turn it to our keynote speaker, Fabrizio Campelli, and I'll introduce him in a moment. Fabrizio is a member of Deutsche Bank's Management Board. He is responsible both for the Corporate Bank and the Investment Bank. He joined the Board in November of 2019, initially as the bank's Chief Transformation Officer prior to assuming his current role. And in August of this past year, he took on additional responsibilities for the Board for both Deutsche Bank U.K. and Ireland. Fabrizio joined the bank in 2004. And since then, he's held many positions, including Global Head of Wealth Management, Head of Strategy and Organizational Development as well as Deputy Chief Operating Officer of the bank. Let me now turn it over to Fabrizio. Thank you.

Thank you very much. It's actually really exciting to be having our first FIC conference here in our offices of Columbus Circle. And we hope this will be the first of many and so I really appreciate all of you who made it here in person, and of course, all of those who are joining us online. And what I thought we would do is speak a little bit about the -- some of the aspects of the strategy of Deutsche Bank that we've announced just recently in March at our Investor Deep Dive event, and in particular, the Global Hausbank strategy we've highlighted and as well as speaking a little bit more in detail about elements of that strategy and how they're going to support us towards our 2025 goals. I will also spend a bit more time on the Corporate Bank and the Investment Bank, the 2 businesses that are under my responsibility. And I will also give a short summary of the first quarter results that we announced a bit over a month ago because I think they are a good indicator of the journey that the bank has been on to in terms of the resilience and the robustness of the results we've shown. So let me get to the summary page. So I'll start off, as I said, talking a little bit about Q1. We have shown that the results that we've presented, despite actually focusing on a really challenging environment in the first quarter and an environment in which we've attempted to continue to focus very heavily on client results, they actually displayed a very strong performance for the bank. We had the highest quarterly net profit we've had since 2013. And you look at the group revenues at EUR 7.3 billion for the first quarter were and 1% up from the same quarter in 2021, which in turn was actually one of the strongest quarters we had up until that point in time. The 8.1% return on tangible equity is actually a particularly strong return consider that our full year target of 8% is and what we've been continuously pointing to us, the target of the transformation phase of our strategy. 8%, by the way, is somehow affected by the bank levy that is applicable to the single resolution fund levy that is applicable to European banks that are all charged in Q1 every year. If you were to spread the charge, was in excess of EUR 700 million over 4 quarters, the 8% would actually be in excess of 11.8%. So it shows that actually, if the bank levy were to be spread more evenly, despite the seasonality of the first quarter, Deutsche Bank is clearly well on track to achieve its goals for 2022. On profitability, on cost, you see that 73% cost-to-income ratio, once again heavily saddled by the bank levy in Q1, is actually a really strong performance. If you again spread the bank levy on quarters rather than embedded all in Q1, it'll be a 66% cost/income ratio for DB in the first quarter. And again, if you were to take the bank levy out altogether to make it more comparable to some of our American peers who don't have those charges, it'd be around 63%. So it shows that Deutsche Bank in the journey of restructuring is showing in Q1 a very strong resilience. If I go to resilience in terms of capital, obviously, despite a highly turbulent quarter in Q1, capital held up quite strongly, we clearly are well equipped based on the strengths of our balance sheet to withstand the volatility that occurred in the quarter. You see with a 12.8% core Tier 1 ratio accounting for a number of model changes and a number of effects, particularly triggered by the Ukrainian war, it clearly positions us quite well in terms of what's to come in 2022. If you look at individual businesses, each of them actually showed positive operating leverage in Q1. Again, very important because we've always said that 22% was the year in which the strategy was coming together and that positive operating leverage manifesting itself for each of the 4 businesses is particularly important. All 4 businesses grew revenues. And in fact, many of those revenue growth trends are really speaking to the sustainable growth dynamic that we've been pursuing since the announcement of our strategy in 2019. In the Corporate Bank, in particular, we had an 11% growth year-on-year. And this was actually the second quarter in a row in which we showed double-digit revenue growth. And again, this is the result of a number of effects, not just deposit repricing, which is something the Corporate Bank has been pursuing to counter the negative interest rates environment in Europe, but also deliberate activity in growing businesses in each of the lines inside the Corporate Bank. And in particular, we had loan growth, deposit growth, I'll come back to that in a minute, and off a double-digit percentage on each of those. And it shows that the Corporate Bank is not just growing in line with market, but also gaining market share in some of its activities, in particular in the corporate cash management part. Investment Bank, 7% growth year-on-year. That is particularly strong because you may remember that the Q1 2021 quarter was very, very strong for the Investment Bank at DB. Much of that growth manifested itself in FIC. We had a 15% revenue growth in FIC, and that offset the challenges that the Origination & Advisory fee pool is experiencing across The Street. There, our contraction in revenues in Q1 was actually more benign than those of our peers. So with a 28% decline in Origination & Advisory revenues, we actually managed to perform better than many of our peers. And if I look at the Private Bank and Asset Management, there too, with strong growth, really underpinning the business model that was outlined in 2019 of a more resilient and more predictable revenue outlook. That operating leverage is actually really key to the strategic priorities that the bank has laid out for itself back in 2019. We spoke at the time of the need to stabilize the bank and then to move on to sustainable growth. Well, one shows that the progress on those strategic priorities laid out back then are actually working out quite well. The Corporate Bank growth, and despite very significant challenges, many of the challenges we experienced as a result of the Ukrainian crisis actually did manifest themselves in the Corporate Bank. And despite that, we've been able to show very good progress on that front. We've had the interest rates obviously starting to be more of a tailwind, particularly in the non-euro -- European area, obviously, Asia and the U.S. And this helped us rebalance some of the pressure points that we had in the past in this business. Loan growth, I indicated we have EUR 8 billion growth in Q1. That's a pretty substantial increase, which accompanied with a deposit growth of EUR 13 billion in the quarter, again, non-euro deposits, it really helped to show that the growth was not just the result of tailwind in the interest rate environment, but actually the accretion of our core book advancing. Cost discipline was also a key theme in the Corporate Bank throughout 2021 and the first quarter of this year, which led to a nearly EUR 300 million profit before tax, which was a 25% increase in the quarter. Looking at Q2, we see many of the trends we've seen in Q1 continuing very much in line with a strong performance actually being present across all the business lines inside of the Corporate Bank. If I move to the Investment Bank, clearly FIC, our fixed income and currencies, franchise has enjoyed a very strong momentum in Q1. And this is across institutional and corporate clients. And this is also the result of a number of measures that we've taken, plus the fact that the acknowledgment of the progress made by Deutsche Bank by credit rating agencies has clearly made DB a more attractive counterparty to many of our clients that have come back to us in full force, and we're starting to see the benefits of that credit rating development. If you add on top of that investments we've made in people, in technology, in specific areas and off the trading businesses, but also the continuity of leadership we've had in the Investment Bank, we really are starting to see very steady results across the entire platform. M&A, as an example, experienced an 80% increase in the first quarter in revenues, and that offset many of the challenges we've seen across The Street in the financing and the capital markets businesses. But this did lead the Investment Bank to having a EUR 1.7 billion of profit before tax in Q1, which again was a record result. Looking at Q2, we're actually quite happy with the performance we're seeing as a number of the trends we've seen in Q1 are actually continuing in Q2, in particular, in the fixed income and currencies part of the business. Again, I mentioned Private Bank and Asset Management. They've had very steady performance in Q1 as well. The Private Bank, in fact, had the best quarter since the launch of our restructuring, our transformation strategy in the middle of 2019. And Asset Management did a 7% increase year-on-year in revenues and is actually showing that the impact we're having of higher management fees is capable of offsetting the highly turbulent market performance that we've seen across asset classes in the first quarter. We believe were very clear on the fact that from here on and in the Investor Day we had in March, we've articulated it quite explicitly, the strategy needs to evolve. And what we've presented for 2025 is a move away from a very strong focus on transformation and one that shifts much more towards sustainable growth. This is really important because we have ambitious targets that were laid out for '22 and even more ambitious targets linked to the bank in 2025. And the way we intend to pursue that is really anchored to this notion of being a Global Hausbank. We cover clients across the spectrum, corporate, institutional, sovereigns, private clients, retail clients and high net worth clients. And at times of volatility, in particular times of uncertainty, being able to be the point of reference bank across all of those needs becomes ever more important, and we are seeing it already this year. So our aspiration is, therefore, to be the Global Hausbank, the bank that can operated on an integrated basis across financial needs and being a point of contact across products, segments and geographies. And this first call concept is actually positioning us quite effectively already. We are the leading bank in Germany, one of the lead bank in Europe. Obviously, we have a global presence. And for many clients, particularly at times like this in which they need to rethink some of their supply chain corridors, some of their global investment strategies, it's starting to really pay off. Also, this is not a strategy that we are suddenly coming up with. We've been building to it over the last couple of years. And we're now really pivoting our position, our stance towards making it a much more central part of the way we attack the market. In March, we spent in our investor detail, Christian Sewing and James von Moltke, our CFO, spent a fair amount of time explaining what exactly we intend to do to deliver this sustainable growth going forward. I think a lot of this was to pivot away from this restructuring model, the stabilization of the bank into much more of a resilience mode that would -- essentially the balance achieved across 4 businesses position us quite effectively for the next phase of our growth. That next phase will be predicated on 3 aspects, which we've been repeatedly pointing out. One is making that growth sustainable. In other words, balance across the businesses in ways that will not create overreliance on any one part of the business or any particularly high volatility type of business. The second aspect is efficiency. We cannot let go of the hard-earned cost discipline that has become a very key theme of the bank in the last few years. So that efficiency imperative remains very strong. And the last aspect is self-funding. The intent is to continue to do what we're doing without tapping on to external sources, but continuing on the journey of self-funding and all our investments in growth. In that theme, client-centricity will be one of the most important aspects. And over the course of the last few years, this has become a really important element of the mindset that the bank has embraced. It was one of the opportunities perhaps Deutsche Bank missed in the past. It's certainly seeking not to miss it anymore going forward. With the establishment of the Group Management Committee, which brings together all of our businesses, that mindset started to be embedded at the top of the house. We have a client-centricity approach right at the top table where all our business leaders actually share joint responsibility for account coverage for our most important clients. That mindset is then cascaded into individual teams, client service teams through dedication targets being set, cross-selling ambition. And all of this gets measured regularly and brought back to the center and assessed for performance and progress. Some of you may remember, in December 2020, we had an Investor Day. And at that time, I was, as Mark mentioned, the Transformation Officer of the bank. And we were just pulling together the more systematic aspects of our client-centricity framework. And at the time, we set out to achieve EUR 0.5 billion of cross-divisional revenues that we had the ambition of achieving effectively by better collaborating within the bank by 2022, so by the end of this year. And based on the latest data, actually, we are very much on track to deliver against that objective. And this is important because, again, when we think about Deutsche Bank and the guidance it has provided on revenues for this year, knowing that EUR 0.5 billion of those revenues will be generated not by gaining market share, not by having to attack the market, but actually simply by collaborating more effectively inside the bank, that's what gives us high confidence towards those goals for this year. Now lessons from the past tell us that growth in itself is not an objective we can handle our entire strategy on. We need to make sure that, once again, the hard-earned discipline acquired on conduct, on culture, on controls is not lost. We've invested very heavily, again, on mindset, on technology, on controls, on people to making sure that the performance we're drawing today is and will remain sustainable going forward. And so we're continuing to invest on making sure that particularly our control environment is one that will continue to be robust, efficient, secure and reliable. But the control environment is only one aspect. It's really the mindset of the bank on conduct, on culture and the commitment we all make to keeping the bank in the right spot that is critical because any lapse is obviously potentially very harmful to our clients and the bank. Now within the 25 strategy, the 2 businesses I'm responsible for will play a particularly important role. The Corporate Bank will actually have a pretty central part and will play a pretty crucial role in that proposition of being a Global Hausbank. It's actually a business that touches pretty much every institutional and every corporate client. We are present in 151 countries. It's actually the ultimate global business in terms of the reach it has and the connectivity it establishes across our clients. It has a very comprehensive product suite across corporate treasury services, institutional treasury -- institutional client services, trust agency services as well as custody activities. And it is really a first call partner to many of our global multinational corporation clients. Obviously, we are very anchored in Germany. The fact that we are the #1 corporate bank in our domestic market and is really a go-to partner for most German corporates gives us a very strong platform to build upon. The growth it has committed to is actually a very global growth. And Asia, in particular, will play a very important part in that growth journey. The fact that we are also investing heavily in our -- in the digital solutions that clients are requiring more and more in this part of the business is already bearing some results. Since the formation of the Corporate Bank in 2018, we've started to develop a series of new products enabled through technology, in some cases, developed in-house, in some cases, through partnership with fintechs, such as Fiserv in Germany. And the fact that we are being one of the banks that is introducing market-leading digital services to some of our clients is being appreciated and is giving us also a platform that gives us comfort around the revenue growth targets we've laid out for this business. It's also important to say our clients are increasingly struggling with the need to embrace and disclose their own commitment to ESG targets. And being a partner to those clients that can actually not just help them towards having a much higher portion of their debt, of their issuance, in some cases, of investments being ESG-compliant, but also being able to support them on the disclosure requirements on the data collection and delivery is something that we're taking very seriously. In some cases, we're even a key partner to transactions that really become key transactions in highlighting the importance of sustainable practices by key corporates worldwide. An example is BASF. And they've just launched or they're in the process of launching the largest offshore wind farm just off the Western Coast of the Netherland, and Deutsche Bank is the leading financial adviser in that transaction. It's going to be one of the largest ever transaction of that type ever done. BASF, leading chemical company in Germany, diversifying its sourcing of energy towards wind farm and basically creating a wind farm, the size of which could provide energy to over 2 million homes, and DB being the partner that is enabling them on that strategy. Similarly, on the Investment Bank, the role it will play towards the growth objectives that we've laid out for '25 will be quite relevant. Let me point out the relatively more contained growth that we have highlighted in March. These are the numbers that we've shown in March of 1% to 2% compared to 6% to 7% revenue growth for the Corporate Bank is out in the fact that we do expect a normalization and the revenue progression of the Investment Bank. And it is really critical for this business to continue to support clients who are navigating very turbulent times and risk management support and also across all of the requirements of those clients. We're seeing that the engagement and the dialogue is richer than it ever was, but it's also exposing them and us to higher risk than we've seen in the past. So the strategy here is between now and '25 to really consolidate our market leadership position. We are the #1 FIC franchise in EMEA. We're the #2 in Asia Pacific. We want to strengthen that position, not give up any ground in Origination & Advisory and really hang on to the #1 position in Germany, which we've regained in 2021 and continue to really defend the areas in which we're really strong, for example, as you see on the page, the top 3 global financing business and top 3 debt origination bank in Europe. A lot of the success of the Investment Bank in the last couple of years has really been down to clients returning to Deutsche Bank. I explained earlier, the rating of credits played a big role to it. But it's actually the fact that they see that Deutsche Bank is not retrenching from its global ambition or its ambition to be in FIC and in Origination & Advisory a reliable partner to some of these clients. And the investments we're making in people and technology are really geared towards reconfirming that commitment and confirming our relevance in those businesses. Those investments, by the way, continue to be quite focused in areas such as electronic trading in FX and rates, algorithmic trading, in credit trading. And also in emerging markets, we are continuously investing in solutions that actually benefit both the Investment Bank and the Corporate Bank, such as workflow solutions that enable corporate clients to lean on automated and technology-enabled effects capabilities that the Investment Bank makes available to them. Another important aspect is risk management. Clients are increasingly turning to our Investment Bank for risk management solutions. And again, the investments we've made in those systems and the expertise we have in risk management across DB are actually paying off as we have seen in the last 5 months alone, since in the last 4 months, since the beginning of the Russia-Ukraine crisis. So to sum up, I think Deutsche Bank is today a much better balanced bank than it was before. It's operating on the back of a much more strong equilibrium between businesses that complement each other. The bank is stabilized, is resilient. We have this Global Hausbank strategy, which is laying the foundation for the results we showed here. Achieving an over 10% return on tangible equity by 2025 is a key part of the strategy we're laying out. That 3.5% to 4.5% annual compounded revenue growth ambition we have until '25 will make us a EUR 30 billion revenue bank by the end of that year. And the cost/income ratio under 62.5% will bring us in line with peers. And the capital objectives, I think we've made it very clear. We want to stay at around 13% common equity tier 1 ratio. Yes, there would be some volatility along the way. We anyway will not want to drop below the 12.5% common equity tier 1 ratio we laid out in our strategy in 2019. But very importantly, this will be delivered against the ambition to return about EUR 8 billion from '21 to '25 of EUR 8 billion of capital distribution in the form of dividend or share buybacks to our shareholders, so approximately a 50% total payout ratio. Last page is the one that explains where we are in that journey. I described that we've gone through a year of -- a phase of stabilization and transformation. We got to a phase in which we can now look with some ambition at the sustainable growth in -- towards 2025 anchored to a Global Hausbank strategy. And I think now is the time for DB to reap the benefits of the hard work that actually was done during the transformation phase. The intent is to keep growing market share, keep strengthening the businesses that have shown more resilience, keep diversifying the earnings mix and really position us for the ambition that will follow from '25 onwards, which is really what DB is gearing up to do. We don't just want to be the leading Global Hausbank based in Europe, but we do want to actually, on the back of that permanent position we intend to acquire and that ambitious industry leadership we intend to have as a European bank, we really want to make sure that we have leading and lasting shareholder value returns to our shareholders who have stuck with us and who are now seeing the benefits of the bank going forward. We believe we are really well placed to do this, not just as a bank, as a management team. And obviously, we would want to continue to update you on the progress we're making in quarters to come. So thank you very much, and we'll take a few questions.

Yes?

Yes. I just figure....

I think they will hand you a microphone. Just a second.

[ Seth Ershaw ] from Deutsche Bank. So just you talked about Q2 being very happy with how well the Investment Bank is doing. Any specific trends that you want to point out, areas that are stronger than others?

On Investment Bank?

Yes.

Yes. I think performance is actually showing quite strongly across pretty much all lines of business in FIC. In O&A, we're seeing the market in Origination & Advisory, the market has continued to contract in the second quarter. And DB is no different. It's actually going through the same dynamic in Origination & Advisory. And although, again, we're hoping that the resilience and the client positioning we have will once again in Q2 and Origination & Advisory dampen the contraction that other players are seeing, and so that we'll be able to do a little bit better than our peers. In FIC, I think the performance that we've seen across businesses will continue across macro financing and credit. And so we expect that the pattern that we've outlined in Q1 pretty much will continue in Q2. Any more questions on -- yes?

You touched briefly on Asia Pacific with the Corporate Bank, but I think it might be helpful as a global financial services conference, talk a little bit more about our Asia Pacific, our growth plans and how we're thinking about expanding our footprint there.

Yes. So Asia Pacific is a core part of our franchise at DB. It has been historically the growth platform for Deutsche Bank. In fact, famously Deutsche Bank was born out of the need of German corporates 152 years ago to expand their businesses towards Asia, and that bridge was the one that was initially activated through the establishment of our foreign network. That foreign network of branches and subsidiaries has continued to grow very steadily. What we have seen, particularly during COVID, but increasingly during the war in Ukraine, is that, that diversification of corridors and offer and trade activities by some of our clients are trying to rebuild supply chains and creating more resilience towards their own industrial activities is actually resulting in clients turning to banks like Deutsche Bank to help them on those activities. I think in the first few weeks, maybe first month immediately after the Ukraine invasion, a lot of corporates, particularly in Germany, were extremely apprehensive about the impact that crisis was going to have on their supply chain capabilities, particularly in commodities given the high dependency on Eastern Europe and Russia, Ukraine in particular. But I think the ability to quickly diversify our way, finding access to -- in Asia and not just finding access to new chains and new supply corridors supported by strong trade finance capabilities, strong FX capabilities, intervening quite promptly on the supply of credit and trade insurance, letter of credit has resulted in that risk abating. And obviously, for us, we're seeing that level of activity across Asia increasing. Overall, it's a franchise that for us is very relevant. We are present across all our businesses. So the 4 businesses, Corporate Bank, Investment Bank, Private Bank and Asset Management. And we continue to have a fairly diversified strategy across India, China and Southeast Asia. So we're not putting all our bets in any one part of that region. Of course, with the progress that we're seeing with China pursuing a very conservative policy on COVID, we're seeing some rotation of capital in the region away from China into South -- the sub-Asian continent as well as Southeast Asia. And again, DB is quite well placed because across Indonesia, India, we're increasing level of activities with clients across the product set, financing, investments and on capital markets access and risk management. So it remains very central and the Corporate Bank in particular is a business particularly well placed to help global clients to try to tap into that opportunity to operate with us.

Yes. Can you talk a little bit about how do you compete here in the U.S. because you have very large, very strong banks here. What is the strategy? What niches do you choose to play with? And how do you compete?

Thank you. That question is very central because it probably represents one of the most important changes that Deutsche Bank pursued in 2019 when there was a clear decision to pivot away from attempting to compete with bulge bracket players across the globe and attempting to compete on league table across the board. And the set of decisions that we're taking particularly in Investment Banking at the time actually did put our American strategy very much at the center of a lot of questions. Can a bank like Deutsche Bank be viable in North America if it's not pursuing a head-to-head competition strategy against some of the very formidable banks that operate in this continent. At the time, the strategy was to really focus on the things we can be good and relevant at. And so we did reduce significantly focused on aspects of our Sales & Trading businesses. Famously, we exited equities, which was very present in New York, in particular. But we also revamped our entire Origination & Advisory strategy and the coverage model away from pursuing league table position across all industry sectors and products, focusing much more on a set of clients around which we could be relevant and have a high performance, high focus going forward. This is not to say that we gave up on ambition to effectively cover those clients. On the contrary, thanks to the granularity that we can acquire in this business in Origination & Advisory on those clients, Dealogic and other sources, actually, on the client segments we've identified as target, we're very, very much focused on achieving the share of wallet, the market share of those clients that we believe we can achieve. And so the focus and the discipline is higher than it was before. But by not pursuing, not attempting to go head-to-head with banks which obviously, in this region, are much larger than us, we avoided the spinning wheels in the market segments in which the investment was simply going to be beyond our means. The result is that our Origination & Advisory franchise in '21 was at its highest profitability in the previous decade. And that strategy was particularly valuable here in the U.S. where we went from having a structurally loss-making business because of all those investments in areas that are very expensive and monetize only over time and have a lot of competition, to having a very profitable model, which obviously, Mark, in particular, has been a very strong proponent of and has been able to operate globally. But it particularly paid off here in North America where the fee margin is higher and we are capable of offering a very capital-efficient model. On FIC, the strategy once again is to be present, be relevant. Those are much more global businesses. And so being able to stay in that top 3 position globally means that we want to hang on to the position we have in North America. But once again, the intent is not to be the top fixed income player in North America. That would set us up for competition that goes beyond our appetite. What we want is to consolidate a global top 3 position by strengthening our top 1 position in EMEA, sticking to the top 2 position in Asia and really keeping our place globally, in particular, in those businesses like FX and rates that are managed on a global basis. A few more minutes if there are more questions on the business. Otherwise, I'll take that as my presentation having being thoroughly comprehensive and having exhausted every doubt that people had on our businesses. Well, assuming there are no further questions, thank you very much for today. I hope you will have an exciting and interesting couple of days to follow in the conference. And obviously, I'll be around and I look forward to engaging with you bilaterally over the next day or so. Thank you so much.