Deutsche Bank has been playing catch-up for almost 10 years as it has striven to transform itself from a traditional deposit-taking and lending commercial bank into the kind of financial counterparty its corporate and institutional clients wanted: one adept at capital markets and investment banking, as much as at lending and transaction services.
It is now near to succeeding in radical self-transformation that, until recently, had seemed beyond it or any other European bank.
The bank has emerged as the most powerful sales, trading and new issue firm in European bond markets after a careful build-up of a large institutional distribution network to complement its strong banking ties to corporate issuers. It has emerged at the head of the foreign exchange rankings, according to Euromoney’s widely followed May 2000 survey, becoming the first bank ever to surpass Citibank in the poll’s 20-year history. This triumph comes at a time when new forces are driving the forex market: corporates hedging exposures arising from large cross-border mergers and institutional investor capital flows. Deutsche is among the world’s top four asset managers and private bankers. Only mass market retail banking in Germany is a weakness – because of the huge number of quasi-public sector banks, which depress margins.
Addressing US weaknesses
The bank has recently addressed one of its most glaring weaknesses – lack of critical mass in the US – through acquiring Bankers Trust, the integration of which, so the evidence now suggests, has progressed more smoothly than the bank dared hope. This has also brought it Alex Brown, an investment banking business focusing on new economy and growth companies. The bank has successfully built up its equities business – something for which it is not always given due credit. Its equity capital markets business is vastly improved on a few years ago. Mergers and acquisitions remains a weak spot, in comparison with the bulge bracket firms, but Deutsche is addressing it.
Even at the moment of maximum embarrassment this year, when Deutsche was forced to abandon its plan to merge with Dresdner and with it plans to restructure a poor-performing domestic retail branch network, Deutsche was able to show the fruits of its transformation: strong 1999 results and a first-quarter 2000 operating performance 50% better than the same period last year.
Looking back to the start of this transformation, Rolf Breuer, chairman of Deutsche Bank, recalls how far behind Deutsche was: “We didn’t have the skills or talents. We had to ask ourselves: ‘Where can we learn?'” London was the obvious answer and Breuer’s predecessor, Hilmar Kopper, began the long charge with the acquisition of Morgan Grenfell. For five years Deutsche kept its new investment bank on a long leash and when it moved to fuller integration found a rebellion among bankers who had got used to the delightful combination of a wealthy parent and much independence. There followed an initially unsettling period of building under new leaders from outside, notably Edson Mitchell from Merrill Lynch. Mitchell oversaw the building of the modern Deutsche Bank and its dominant global markets division and has recently joined the board with one of his key hires, Michael Philipp, who ran equities.
In 1998, Deutsche realized it needed to address its weakness in the US, where 60% of global investment banking fees are generated.
When US financial stocks halved following the Asian crisis, it bought Bankers Trust. “The integration of Bankers Trust has taken less time and been more successful than we first imagined,” says Breuer, “and I must ask myself why. Partly it was luck and booming markets.
Making money and doing successful deals brings people together. But also many talented people at Bankers Trust, who had been feeling rather let down, came to realize that we offered them a strong credible platform and a real second chance. I think many decided to give it six to nine months and then either stay or walk away.
We delivered and people stayed on board.”
Breuer now contends that Deutsche has established itself in the bulge bracket, that global markets and equities sales and trading are performing strongly. The question of whether to buy or build in M&A seems to have been decided. Deutsche will build. “Obviously we have to take notice of the tremendous inroads US firms have made with leading corporations in Germany and continental Europe and how they have succeeded,” says Breuer. “What clients want to see in investment banking is track record. Deutsche has had an uphill struggle because we had no track record in advisory. But we are starting, so that corporations are beginning to think of Deutsche Bank as an institution that can contribute.”
Transformation is likely to continue. Deutsche intends to shift its asset mix further from loans to securities, mindful that the biggest danger for banks is credit losses, not market losses. Meanwhile Breuer encourages his managers to think in new terms when dealing with large corporations. “If you tell a corporate treasurer that the bank is not earning enough return from his business and that he must either buy more products or look elsewhere, he will understand that. It’s how corporates talk to their own customers.”
High-growth relationships
And while Deutsche fights for the hearts and minds of larger corporate clients, which increasingly choose lead banks purely on their track record relevant to any given transaction, it has another card. “Medium size and fast-growing companies are the backbone of industry in Germany and France,” says Breuer, “and here Deutsche Bank can play a real part. We know many of those companies well and they tend to rely more on traditional relationships. We hope to grab a considerable part of this business across Europe. Alex Brown will help.”
Breuer sees opportunities here to reinforce the bank’s other mainstays: asset management and private banking. The bank counts itself in the top four worldwide in asset management and private banking and sees further opportunities. “It’s a question of bringing the whole together,” says Breuer. “Really high net worth private banking customers want to be treated like institutions.” He suggests the bank’s links to fast-growing small and midsize companies in Europe should present private equity investment opportunities that Deutsche can share with its wealthy private banking clients.
The bank is keen to expand private banking in the developing world. Breuer says it might consider acquiring an asset management firm but that prices are so high now that only those prepared to pay a strategic premium for entering the business can justify them.
Deutsche is making large investments in the internet area. “That whole sector will completely change our business: revolutionize it,” says Breuer. “We have to be a first-mover in this fast-moving world and we are investing heavily in both the B2C and B2B area, with a lot of projects running.” Deutsche Bank will redeploy capital released from selling industrial holdings in internet ventures, as well as using proceeds to boost its tier 1 capital ratio from its present 6.2% towards 8%.
Breuer knows internet investing involves trial and error. He says Deutsche is prepared to consider new forms of alliances, for example with IT companies.
While pursuing these new ventures, Deutsche had been prepared for radical surgery to its retail network under cover of the Dresdner deal. The question remains. “What do you do with the existing bricks and mortar network.
It can be that in five to 10 years’ time, we will need less than half the bricks and mortar branches and two-thirds of all transactions will be done through electronic means.” It was partly in an attempt to derive more revenue from the old bricks and mortar network by pushing more products through it that Deutsche came to the idea of working with Allianz. For now the problem remains.
“We are not under severe time pressure because domestic retail banking is at least profitable for us. But it will never be profitable in the manner of Lloyds TSB or the Spanish banks. And after the merger collapsed we have had a lot of phone calls from potential partners. This suggests to me we were thinking along the right lines. We may try to reach a comparable result with other partners.”
He insists the collapse of the Dresdner deal has not damaged morale. “Rather, there is a feeling that we can achieve what we have to achieve. We have momentum, the figures are good, the pipeline of business is satisfying, we’ve made the bulge bracket.”
