Deutsche’s corporate business bets on transaction banking

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By:
Kanika Saigal
Published on:

The German bank’s transaction banking franchise will be central to the success of its new corporate banking division.

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Deutsche Bank’s restructuring is well under way, and Stefan Hoops, the recently appointed head of the corporate banking division, believes the new structure is already paying dividends for the business and the bank.

“The benefits should be reflected in our 2019 financial results,” he tells Euromoney.

Announced by CEO Christian Sewing in July, the bank’s transformation focuses on four pillars – corporate banking, investment banking, private banking and asset management.

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Stefan Hoops,
Deutsche Bank

Under Hoops, the bank’s capital markets and transaction banking businesses were brought together under corporate banking, due to the overlap in terms of the client base served.

In addition, smaller corporates, previously serviced by the bank’s retail franchise, are now being served alongside larger corporates within the corporate banking division. This involves one combined salesforce selling a range of products – from FX, hedging and structuring – to all corporate client customers.

Hoops is also responsible for the refocus on Deutsche’s corporate banking business in Asia, which he believes can be a natural alternative to the US corporate banks doing business in the region.

“Before restructuring, we had people that covered corporates spread across the bank – in coverage, foreign exchange and transaction banking – but under the new structure, we have centralized this, which makes it much better for our corporate clients and the bank,” he says.

“With everyone focusing on corporates through one division, corporate banking is no longer the ugly duckling within other banking divisions, which has done a lot for our motivation.”

GTB

For 39-year-old Hoops, Deutsche’s global transaction banking (GTB) is the glue that holds the corporate banking division together, but he is keen to stress that “this isn’t a sign that the transaction banking business will completely take over the corporate banking division”.

Nevertheless, transaction banking accounts for a large proportion of the bank’s corporate banking division. In the third quarter of 2019, GTB accounted for €987 million of a total €1.3 billion in net revenue for the bank’s corporate banking business.

The bank’s transaction banking success has also been recognised by clients, even while its shareholders have suffered.

In the most recent Euromoney trade finance survey, published in January, Deutsche ranked second in terms of market share and for services. In Euromoney’s cash management survey, published in September, Deutsche was the leading financial institution in terms of market share.

However Hoops describes it, transaction banking will inevitably be central to corporate banking – and Deutsche as a whole.

“Looking at the market environment at the moment, it is clear to see that we are not the only bank that is moving towards corporates and commercial banking,” says Hoops.

“It is the market that is growing the fastest, and we are sending a clear message to our competitors of our intentions in this space via the restructuring.”


Our traditional transaction banking business has grown 9% year on year, so we know there is still a lot of money to be made here, despite the headwinds 
 - Ole Matthiessen, Deutsche Bank

Transaction banking has grown in importance for banks more generally, given the sticky, stable customer relationships and revenues that the business promises, especially in the decade after the global financial crisis.

At the same time, technological innovation is creating a much leaner business, especially once banks have made the initial investments into removing legacy systems and operating off single platforms.

Working with fintechs and within consortia also helps bring the cost of transaction banking down, while maintaining relatively strong returns.

According to Coalition, total revenue for fixed income, currencies and commodities, investment banking and equities for the 12 largest banks it covers fell from $167.2 billion in 2013 to $150.9 billion in 2017, and increased marginally in 2018 to $151.4 billion.

At the same time, transaction banking revenue grew from $27.4 billion in 2016 to $28.8 billion in 2017 and $31.3 billion in 2018 for the 10 banks covered by Coalition.

On average, the return on equity (ROE) for transaction banking grew from 21% in 2016 to 26% in 2018. In investment banking, ROE was around the 8% mark for 2018, meaning that transaction banking is much more profitable than investment banking overall.

Cash management

Within transaction banking, payments and cash management will remain key to business growth, says Ole Matthiessen, global head of cash management at Deutsche.

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Ole Matthiessen,
Deutsche Bank

While the payments space is becoming ever more crowded, the market continues to grow, so there is profit to be won if companies and banks can put up with low margins and operate at scale.

In cash management, again, technology is transforming the business, with the introduction of instant payments, cloud technology and online treasury management systems.

However, there will still be challenges.

“The negative interest-rate environment has dulled returns for the bank in general and has led to a significant drag in our results,” says Matthiessen.

“Without the European Central Bank’s (ECB) negative interest-rate charges, our results would have been even better.”

To claw back some of the losses, Deutsche in November started to pass on the cost of the ECB’s negative interest-rate charges to some of their larger corporate clients.

“Nevertheless, our traditional transaction banking business has grown 9% year on year, so we know there is still a lot of money to be made here, despite the headwinds,” says Matthiessen.