Deutsche Bank’s (DB) CEO John Cryan Interview

https://global.handelsblatt.com/edition/505/ressort/finance/article/deutsche-bank-ceo-dampens-merger-talk

The plan is to make the bank smaller

“…part of our work that we are doing is to make our bank a bit smaller in order to make it a bit simpler, because we want to set higher standards for control and we also want to be more successful.”

…as they divest in certain areas

“…some days ago, we sold a bank in Argentina. There are a lot of pieces of the Deutsche Bank Group that no longer make sense in the context of the Deutsche Bank today, including Deutsche Postbank.”

The customer customer has final say on where they will locate their businesses after the Brexit

“I think it is important for the bank to respect that we really need to follow our customers. And in some of our trading areas, London is our biggest trading hub. We trade a lot of papers and derivatives in the Eurozone or in European Union paper. And although we are passported into the U.K. – and U.K. authorities are very keen that we continue passporting – our clients might take us back into the Eurozone or into the European Union because they may demand that we transact with them with a European Union entity.”

There is a chance that Brexit may not be implemented

“I would never say 100 percent, but it is very likely. I think the sense in the government at this moment is that it is marginally the will of the people (to leave the European Union), which we should try to execute in the best way possible.”

The impact of negative interest rates on banks varies with the size of the bank

“If you take a big bank like Deutsche Bank, you have the ability to withstand negative interest rates much longer as we have a diversified business with asset management fees, transaction fees, trading businesses. And they are less affected or not affected. But our core banking business is. And at these margins with deposits, you will make losses. Because the money is parked at the central bank, you can’t use it elsewhere. For a simpler, more monoline bank that is taking deposits and lending it to clients, mortgages or consumer finance, it is more difficult. They have to charge more on the asset side for lending. Because you can’t really charge retail customers a fee or much of a fee for making deposits.”

Would they pass the negative rates to customers?

“…I think banks will have to absorb that cost for taking deposits and try making up for some of the costs in charging a little bit more for lending. And that is the reason why I think the transmission mechanism with negative interest rates isn’t working.”

Deutsche Bank’s (DB) Q2 2016 Earnings Call

John Cryan – CEO

Restructuring to continue

“At Deutsche Bank, we are undertaking as much restructuring as possible in 2016 despite the burden of lost revenues and the added expense in the year. Not to do so would simply perpetuate our structural inefficiency and delay the achievement of our fundamental goal that of returning to sustainable profitability. We’ll not deviate from taking tough decisions just to flatter results in the short-term.”

The restructuring have been painful

“The Bank’s own finances are in very good shape. Over the past four quarters we’ve taken a lot of pain in restructuring the balance sheet.”

Loan losses are smaller compared to historical levels

“In credit, we’re very comfortable with the quality of our portfolios. Our loan losses remains small by any historic measure and our credit books have high stress resilience. ”

Historical low risk trading levels

“In global markets, our aggregate risk-taking – risk trading risk sits at historic lows. Risk management remains tight and vigilant as was demonstrated when markets tested us with the extraordinary volatility we saw following news of the Brexit vote.”

But they still are on the lookout for opportunities for growth

“So we really like the portfolio we have, but we’re also looking for opportunities to take advantage of the environment to deepen in assets we see as attractive. And we continue to look for creative repositioning opportunities.”

They are making good progress with cost control remaining a central focus

“To sum up, the overall report card for the quarter shows reasonably pleasing progress in some trying circumstances. We need to build the Bank’s profitability and the main task of management remains the control of costs, for which we do need to continue to invest. ”

Brexit may give them a competitive advantage

“Yes, on the Brexit, when we operate in London, we in the vast, vast majority of cases, operate out of Deutsche Bank AG itself. So we’re facing our clients and counterparties out of the German bank…We basically view this as something that will essentially be client-driven for us. So we wouldn’t intend to do anything ourselves other than we have to respond to our clients’ requirements. So we are reticent to make any long-term commitments about U.K. other than we don’t plan to do anything of our own best. But if our Eurozone clients in particular increasingly want us to be facing them from locations within the Eurozone, if that proves to be the case, then we are reasonably well-positioned because our head office in home is in the center of the Eurozone. So for us I think we end up slightly bizarrely by having something of a competitive advantage which we didn’t want to create and it’s a bit inadvertent, but we come out of this relatively strongly.”

Marcus Schenck – CFO

The revenues took a big hit

“Global markets revenues were down €924 million compared to a strong prior year quarter, mainly driven by macro uncertainty impacting client flows and idiosyncratic effects stemming from our implementation of Strategy 2020”

Their loan loss provisions declined; they hold a very well diversified Italian loan portfolio

“Loan loss provisions are down 10%, reflecting the continuous good quality of the portfolio. On the back of the recent events in Italy, it is important to note that PWCC’s Italian loan portfolio is very well diversified and provision for credit losses were in line with prior quarters.”

Fiscal discipline helped stabilise costs as revenues remained dim

“Non-interest expenses were up by 5% driven by an increase of restructuring and severance charges of €69 million and higher litigation charges of €28 million for the second quarter. Excluding these charges, the adjusted cost base remains stable…This reflects again strict cost discipline in a pretty weak revenue environment.”

They are committed to the restructuring effort as they aim at sustained profitability

“2016 remains the peak restructuring year for Deutsche Bank. Any meaningful pullback from our restructuring plans would simply delay the Bank’s return to sustained profitability and it’s something we do not plan to do.”

Settling litigation issues have been burdensome

“Litigation remains a burden and while we now have had two consecutive quarters of setting a number of outstanding cases within existing reserves, we still are working diligently to settle the major issues that remain. Unfortunately as you know, the timing of those eventual settlements are ultimately not in our control but we remain hopeful of achieving major settlement this year.”

From the Press release:

  • 20% lower revenues year-on-year reflecting challenging environment and strategic decisions on Revenues and Pre-tax profit of 408 million euros, down 67%.

 

Deustsche Bank 2Q15 Earnings Call Notes

New CEO and CFO

“I have the pleasure to be joined by our new Co-CEO, John Cryan, and our new CFO, Marcus Schenck.”

We have a structural cost problem

“We have a structural cost problem. That’s obvious to all of you who’ve followed the Bank for some time. We will not succeed on our own terms until we simplify our overly complex operating model. It stifles efficiency and it frustrates and delays decision-making. I believe we understand the principal root causes of our inefficiency. We must overhaul our antiquated, fragmented and incomplete technology platform. We have to wean ourselves off an over-reliance on manual processes, and we have to rectify our poor record of managing significant infrastructure investments.”

We have too large and complex a balance sheet

“We also have too large and complex a balance sheet, currently earning returns that do not fund our levies or generate an acceptable risk-adjusted return on leverage-based capital. This is particularly true for long-dated contracts. Although we’ve made some progress, we need to tackle the balance sheet more proactively and more aggressively.”

Don’t need to raise capital

“In this context, let me address specifically the issue of capital adequacy. I am aware that there has been some speculation that we might be considering raising additional capital. It’s my firm opinion that raising additional capital would not solve our core problem of reversing our low financial returns and our poor organic capital generation.”

This is all obvious stuff, but it will take a long time to deliver

All that I’ve just described to you is obvious. Addressing these challenges, however, will not be easy and will take years to deliver, but I’m determined that we will get this done. I fully understand this is no longer about words but deeds”

Why the new CEO came here

“Let me at least take the first one, given that it was addressed to me. I think you know that I’ve been on the Supervisory Board at the Bank for a couple of years, and I was in the position of Chairing the Audit Committee and I sat on the Risk Committee. So the transition into the management team was reasonably logical when an opening came up. And I do feel that although as a non-executive director you get an exposure to the Bank and sitting on the Audit Committee you never get much good news, it was nevertheless fairly logical and seamless in the transition from Supervisory Board to the management.

Why the Supervisory Board? Well after I’d left UBS I spent some time, not literally, on the beach and thought that I’d gained some experience that might be helpful elsewhere, and the opportunity at Deutsche Bank came up and I took it. So there was nothing untoward, and it all was very seamless and took place over two or three years. On the other points, Marcus, do you want to take the one on leverage?”