Deutsche Bank : Fabrizio Campelli, Head of Corporate Bank and Investment Bank –Goldman Sachs European Financials Conference Transcript

Deutsche Bank AG

Goldman Sachs European Financials Conference

Wednesday, 5 June 2024

Transcript

Speakers:

Fabrizio Campelli, Head of Corporate Bank and Investment Bank Chris Hallam, Goldman Sachs

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Chris Hallam	Thank you everybody for joining us for this
	session. It's my pleasure to welcome Fabrizio
	Campelli, Head of the Corporate Bank and
	Investment Bank at Deutsche Bank, to the
	European Financials Conference. Fabrizio has
	been responsible for the CB and the IB on the
	Management Board since 2021. Prior to his
	current role, he was Chief Transformation Officer
	for DB having joined Deutsche Bank 20 years ago,
	2004. So today's focus areas for the discussion,
	we're going to begin by looking at Fabrizio's core
	area of responsibility, so that's the CB and the IB.
	And then we'll broaden out to talk about Deutsche
	Bank more from a Group performance perspective
	and leaving some time at the end for Q&A. So first
	of all, Fabrizio, thank you so much for giving us
	your time.
Fabrizio Campelli	Pleasure.
Chris Hallam	So, let's start with that, the CB/IB nexus, call it
	that. When I talk to you or your fellow
	Management Board members about the
	Corporate Bank and Investment Bank, the word
	that keeps coming up is relationships. The idea
	that the depth of the relationships DB has across
	large corporates is a key competitive
	differentiator, enabling you to bring the breadth of
	the Global Hausbank strategy to clients. Is that
	really the secret sauce, and what opportunities
	does that create for you in the CB and the IB
	compared to competitors both in Germany and
	abroad?
Fabrizio Campelli	Thank you, Chris. Well, it does represent an
	important part of the narrative. If you think about
	it, DB went in 2019 from a restructuring, a
	transformation process, we call it Compete to Win,
	it was a focus on the areas in which we had the
	ability to compete effectively, to a strategy, which
	in 2022 we announced as the Global Hausbank
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strategy. Much more focused on delivering to clients a model that is resilient, that can be their first bank of call, and that can provide solutions to complex needs that they have across their needs, but also can continue to provide that global reach. So we reorganized the bank around four very client-centric businesses, each of which has a focus on contributing to a balanced, resilient business model, but within it, with a very high focus on client relationships.

And that became a strategy of how we set up the various businesses, what we focused on, the type of product focus, solution focus, but it became also the way we organize the bank itself. In the Investment Bank, we refocused around fewer products but much more deeply organized around client requirements. Our coverage teams now in the Investment Bank are one focused on corporate clients, one on institutional clients. We have embedded inside of the Corporate Bank, a team dedicated solely for corporate banking clients for their investment banking needs. We reorganized the entire Corporate Bank around three distinct client segments, the Institutional Client Services, Corporate Treasury Services, and the German smaller business, which we call Business Banking. So a business run by client segment. While historically it had been very much run by product. The Private Bank, to reach into my colleague's teams, has been more distinctively built around the German retail bank and the international private bank, which is more of a wealth management focus.

So the bank has really made a pivot, and this is starting to show deep results. We are able to get to a much higher level of focus with those clients. For each division, we're able to find the opportunities that cut across businesses, provide growth upside, and we're seeing the results of that in each of our businesses. We have

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	operationalized this in particular through areas
	such as our focus on cross-divisional
	collaboration, creating new tools, providing better
	analytics to our client officers around their clients,
	focusing on product density, really enhancing our
	ability to provide multi-product relationships to
	clients that basically cement their relationship
	with us. It's becoming more important these days
	because with higher uncertainty, we also see
	clients tend to want to gravitate towards fewer
	banking relationships, and so it's benefiting us for
	having made those investments in the last few
	years.
Chris Hallam	Very clear. And then diving maybe a bit more in
	depth into the Corporate Bank. The business
	accounted for around 30% of group revenues and
	around 50% of pre-tax income in 2023. In 2022
	and 2023, you actually grew revenues more than
	20% in each year, versus the target of a
	compound annual growth rate of 6 to 7%. So can
	you talk about the business dynamics in the CB,
	aside from the tailwinds from higher interest rates,
	what are the biggest growth opportunities and
	how should we think about the revenue
	development going forward from here?
Fabrizio Campelli	Sure. Indeed, 2023 was a very, very strong year
	for the Corporate Bank, and partly the market
	environment was very benign. We had clearly an
	increase in net interest income that provided the
	big tailwind to our performance, which is why we
	exceeded that CAGR target we have out for the
	business. But when we think about what has
	actually happened under the hood, there was
	clearly support from NII, but there was also a lot of
	work that went into building out the Corporate
	Bank that we want, that we have indicated is
	going to be part of the future anchor for that
	Global Hausbank strategy. So a lot of focus went
	into pricing discipline, building out capabilities in
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the non-interest revenue space, as all that kind of lower interest rate sensitivity business requires a fair amount of investment on capabilities, on technology, and actually connectivity with the rest of the bank.

And this has paid off because as we look into

2024 with a normalized interest rate environment, we do expect as we've indicated, that the revenue level for 2024 would be slightly lower than 2023 as a result of all these dynamics for our Corporate Bank. But if you look at the drop in NII that we're observing across the Street and for DB, actually we are seeing that it is being well offset by a number of dynamics that speak to the efforts we've made to protect the franchise from the expected NII adjustment. Specifically, things such as investing in the payments infrastructure, investing in our merchant solutions space, on technology solutions that actually build on the connectivity between the Corporate Bank and Investment Bank to provide the fee and commission income to DB on a steady state.

An example of that is what we call workflow solutions for FX where we support corporate clients with automated solutions when they deal with high currency control environments. So instead of having to build their own capability and dealing with FX flows, when they import or export to certain jurisdictions in emerging markets, we take care of all of that for them through an automated workflow tool that then is remunerated through a fee payment and builds into the FX capabilities of the Investment Bank. Another important dynamic has been a focus on volumes. We've seen an increase in deposit volumes. In fact, from Q1 2023 to Q1 2024, we've had an 11% increase in deposits.

Partly it was a low point at the end of Q1 last year as there was uncertainty around banks, but partly has been a very systematic build out of deposits,

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which increasingly are term deposits, and so, have level of stickiness and predictability of income, which is helping us. All of this is therefore resulting in a pretty resilient revenue base in Q2. For the Corporate Bank, we expect revenues that will be approximately at the same level as Q1, which speaks to the fact that this continued NII drop is actually being offset by these non-interest sensitive revenues. In the outlook, the growth potential for the division remains very strong, partly because of everything I just said. There has been good discipline in preparing for this revenue substitution needed. There has been good investment being made by geography, but also by client segments.

We've been very systematic about investing in multinational corporate capabilities, particularly in Europe and in Asia. In the US, we've been very systematic about strengthening capabilities we have in areas that we are traditionally quite strong in our Trust and Agency Services. That's a business in which we offer trust services, depository receipt, documentation custody. And those are products that actually are very fee rich and with good growth prospects. In Asia, we've also built quite heavily on the new corridors that have opened up. As people post-COVID, post the Ukraine crisis have been looking to diversify their supply chains, new supply chain corridor, which means new trade finance corridors, new FX corridors for corporate treasurers have opened up, and we've been very good at actually leaning on the capabilities of the bank to respond to those needs.

Those are all showing strong improvements. We've also invested in technology. We continue to invest heavily in technology in the Corporate Bank, specifically on solutions that enable both our payment capabilities, our cash management capabilities more broadly for typically corporate

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	treasurers, but also for merchant solutions and the
	ability to tap into a vastly changed payment
	environment around our bank. So we continue to
	be very confident around the prospects for the
	Corporate Bank, and it remains at the heart of our
	Global Hausbank strategy, one of the core
	businesses.
Chris Hallam	Very clear. So maybe now let's turn to the
	Investment Bank. You have a seriously big FIC
	franchise, the largest in Europe by some margin.
	Now intuitively the visibility on FIC revenues is low
	and momentum has been strong recently,
	suggesting that we would be due some kind of
	normalization. But at the last set of results, you
	gave some extra disclosure for FIC in terms of the
	revenue mix in particular, highlighting the share of
	the more predictable revenues in terms of the
	Financing business.
	Can you run us through the FIC footprint, the
	product areas you think that are more predictable,
	we should focus on and how predictable those
	revenue streams are? And in that regard, can you
	talk about the scale you have in FIC, and how that
	enables you to grow and outperform some of your
	competition?
Fabrizio Campelli	Thank you. You're right, the focus on the more
	predictable income is a very central one for our
	Investment Bank, truly for DB as a whole. We've
	made a great point of showing how at the end of
	2023, over three quarters of our Group revenues
	were coming from more predictable revenue
	streams, including the FIC Financing business.
	FIC is indeed a larger champion for Europe,
	certainly a very important FIC player in the
	European banking landscape. And when we look
	at it, in 2023 we booked about € 8 billion of
	revenues in that business. If you disaggregate it,
	of the € 8 billion, a bit over a third were FIC
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Financing related. What is FIC Financing? It's effectively a diversified portfolio of businesses, which book mainly in the banking book. It's lending, financing in the traditional sense, but also structuring, securitization and typically on a non- recourse basis.

It's a business that has very strong collateralized profiles. We have had the business managed by the same team for over 20 years. It's almost a quarter of a century, very stable underwriting practices, very strict and strong price and risk discipline, and we've seen the results of that over the last couple of cycles. It's a business that has provided stability of revenues over time. It has provided a big resilience. That's why we decided to actually provide more disclosure of it. Because when you see an € 8 billion FIC franchise, if more than a third of it is actually enjoying this level of stability, that is something that is worth highlighting. This is not to say that we are dissatisfied with the level of resilience of our more traditional sales and trading business within FIC, the remaining part.

Again, we provided some disclosure to indicate how it broadly splits. It's actually a much more evenly split business today than it used to be between its component parts, the macro businesses, Rates and FX in which we are a leading bank globally, but also the Emerging Markets business, in which we practice those macro activities across emerging markets regions. But also increasingly Credit Trading where DB was historically a smaller player, but we have been making systematic investments, including in recent times to actually build out that capability to make the Credit Trading product one that can contribute equally within that portfolio to the other three sales and trading activities.

Why does it matter? Because it answered the second part of your question. It's actually, by

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having been very systematic about having that balance, that complementarity of revenue flows inside of the sales and trading business, that we have been able to show the resilience of revenues and the steady performance of revenues in our FIC portfolio. That diversification has been a key theme of how we have invested. For example, in Credit Trading, we were quite light in 2021. We've invested in rebuilding the Asia Flow Credit business at the end of 2021, the European Flow Credit business in 2022 and early 2023. We've announced quite recently some important investments we are making in the US Flow Credit, and these are meant to be providing the stability of that franchise.

We're not intending to materially grow the business relative to the rest of the bank. We want to make sure that the resilience of the portfolio is maintained through that very strong diversification benefits we're enjoying. The diversification is also not done into new territories in which we cannot judge the risk, but only in adjacent areas where we already have the infrastructure, investment can be contained, and we don't expect materially significant RWA increases. Again, that's with the intent to make sure that this provides stability and not to completely venture into riskier investment strategies.

Lastly, a very large part of the strategy for FIC is coverage intensity. We have invested in coverage intensity. We want to continue to do so because the value it brings is the ability to actually extract much more predictable outcomes from the investments we make. The results I think are showing. I think if you go back to 2019 to the end of 2023, we've increased almost 170 basis points of market share in FIC, which is a remarkable build out. In Q1, our revenues were up 7% in FIC, while they were broadly down for rest of the Street,

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	speaking of that portfolio being well diversified.
	This has happened, despite in Q1, we started to
	see some pressure building on Rates, in particular
	the macro business in general, but Rates was
	particularly affected across the Street.
	That I think has to do with the clear uncertainty
	over the timing of interest rates. Although with
	clarity of direction, it means that volatility is low.
	The result is, I think we've made it clear, our Q2
	FIC revenues are expected to be slightly down
	year on year, but with the strong performance of
	the rest of the Investment Bank, we expect IB in
	Q2 to be up year on year. For the full year, this
	also means that given the strong performance in
	Q1, it's a bit early to tell how exactly it will behave
	for FIC. But for the time being, we're still looking
	at FIC slightly up year on year in total revenues.
Chris Hallam	So pivoting, and you mentioned just now
	Origination & Advisory. So pivoting onto that
	business, which represents about 15 to 20% of
	your IB revenues. At Q1 results, your O&A
	revenues were up about 60% year over year. So
	can you talk about what you're seeing in terms of
	capital markets recovery? What investments
	you're putting into the franchise to try and gain
	competitive advantage, and what's your overall
	outlook maybe in terms of market share gains?
Fabrizio Campelli	Sure. So the Origination & Advisory business, the
	traditional corporate finance business has indeed
	enjoyed across the Street in the fee pool, a
	rebound in the last few months, which was long
	awaited. We have seen some important
	improvements, although we're not seeing the
	complete return to the expected levels of activity,
	particularly in some areas like the more traditional
	ECM business, and much of the M&A activity is
	still relatively muted relative to history. So it's on
	the road to recovery, but I think the market is
	expecting some clear signs on interest rates and
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