Deutsche’s client focus underpins culture shock
The bank’s rejigged corporate and investment bank is its most determined effort yet to crack its global coverage effort, writes David Rothnie.
By its own admission there is nothing revolutionary about Deutsche Bank’s latest rejig of its corporate and investment bank. But the firm believes it now has the structure, focus and determination to haul itself back to the summit of European corporate finance.
The bank finished the first six months of 2017 in fifth position by investment banking fees in Europe, the Middle East and Africa, according to Dealogic. That places it top of the pile among its European rivals but it trails in the wake of US peers and that is far from where it wants to be.
Alasdair Warren, the man responsible for restoring the bank first to its former glory and then taking it to new advisory heights, is pleased with progress and will spend the coming months recruiting the talent the bank needs to execute its new client-driven strategy.
Deutsche began this month with a newly formed corporate and investment bank led jointly by its former CFO Marcus Schenck and Garth Ritchie. The main thrust is to boost co-operation and align efforts around its clients to better serve them and boost revenues.
To achieve this, Deutsche has restructured its CIB around six pillars: corporate finance, transaction banking, global capital markets, equities, fixed income and currencies, and an institutional clients group. Deutsche is merging its ECM and DCM businesses into a single global capital markets function led by Alexander von zur Mühlen in Frankfurt and Mark Fedorcik in New York.
It’s a structure that Deutsche has used in the past but with the exception that transaction banking, which is the engine of its corporate bank, sits within the CIB for the first time.
Warren, who is head of EMEA corporate finance and co-head of CIB EMEA with Ram Nayak, says: “What we’ve discovered is that when clients do business with all three pillars of the CIB, our client returns are two to three times higher than when a client only does business with one pillar. Therefore, by having a common set of clients aligned across these businesses, we aim to deliver better solutions to our clients while also improving our returns.”
For this approach to work, Deutsche is breaking down silos and forcing its bankers to work together across sectors, products and geography. That is most evident with the (re)creation of a global capital markets (GCM) division as a joint venture between markets and corporate finance.
“The purpose of bringing these businesses together," says Warren, "as opposed to previously five separate product lines, is that when you’re serving clients not only do you want to be aligned between product and coverage but you also want to deliver the best solution on a product-agnostic basis. We don’t want people working in silos.”
Product agnosticism is an ugly phrase but for all banks it represents the holy grail of coverage and comes straight from the Goldman Sachs playbook. Few banks have succeeded in achieving it as well as Goldman, which uses its partnership structure to ensure interests are aligned across the bank.
It’s a simple concept that rivals have tried to replicate with varying degrees of success. Under previous CEO Anshu Jain, Deutsche often appeared to actively discourage co-operation, preferring to see teams compete with each other, so the new structure is part of an ongoing cultural shift under John Cryan, Jain’s successor.
Deutsche does not have Goldman’s partnership structure but it does have Warren and Schenck, two former Goldies partners with a determination to put clients at the centre of Deutsche’s offering.
The tone is being set from the top of the CIB with a division of responsibilities. Schenck will oversee all of the bank’s clients across markets and corporates while Ritchie will focus on the bank’s platform businesses — all the systems, processes and execution in both equities and fixed income as well as Deutsche’s transaction banking business.
Both men are ideally suited to their jobs. Ritchie is one of the most respected operators on the Street while Schenck, who helped to build Goldman Sachs’ German operations, is a client-focused banker and, as deputy CEO of Deutsche Bank group, is also seen as a potential successor to Cryan.
In the new CIB, Deutsche will have two main coverage efforts — investment banking coverage, which is designed to serve its clients' C-suites, and corporate banking coverage, which will serve their treasury operations.
The bank’s global industry groups sit within investment banking coverage and form a crucial part of Deutsche’s plan to reclaim the summit of European corporate finance.
“All our industry coverage sits within our investment banking coverage and that’s an area where we’ve been putting particular focus and adding resources," says Warren. "If you’re going to be able to predict what’s going to happen in an industry and then position yourself around it, you need a really good understanding of that industry globally. Hooking up these teams across regions is super-important.”
He says the bank is halfway through a two year process to boost its ECM and DCM businesses, while the bigger project of turning Deutsche into a genuine world-class advisory firm will take three years or more.
As well as improving co-operation, Warren is busy hiring staff in order to deliver in the required timeframe. Senior M&A bankers usually need a year to bed down before they can start bringing clients across with them, so that makes 2017 a crucial year for recruitment. Warren wants to recruit around 10 managing director level bankers this year but a far bigger hiring initiative is underway at more junior levels as he looks to rebuild what he calls the bank’s engine room.
So far this year the bank has plugged gaps in its senior ranks, with Warren hiring Christos Tomaras as head of EMEA financial sponsors and Robin Rousseau as head of EMEA M&A — both from Goldman.
Rousseau, a well-travelled Frenchman, will be based in Paris, but will spend the bulk of his time on the road and Warren is adopting a geographically diverse approach to recruitment as he builds out the bank’s industry coverage.
The spectre of Brexit means that banks will move more resources outside London and Warren is building industry teams across the continent, locating them where there is the greatest client need or the biggest pool of talent.
He began this process last year when he remoulded the Frankfurt office as a second sector hub outside London for the bank’s industrials, real estate and financial institutions teams.
“This is something we are doing team-by-team as we progress through this year," he says. "We have already hired a number of people and we’ve got the flexibility to hire them in a number of different locations. This can serve as the catalyst for building a more junior team and potentially adding a new leg to our industry coverage.”
For example, Deutsche may decide to co-locate its retail and consumer teams in Paris and Milan, where there is a high proportion of that activity. After Brexit, Deutsche’s bankers will continue to be citizens of the world under a structure that imposes discipline and consistency.
Warren is not given to hyperbole and freely admits that Deutsche’s overhaul mirrors that of the rest of the industry. “The structure is pretty much the same across the industry," he says. "We differentiate ourselves by getting people to work smarter and better together.”
How does Deutsche do that? “It’s as simple as getting people regularly in one room or around a phone discussing industry topics, agreeing a common set of priorities and agreeing together as a team how to execute around that. It’s not that difficult but it does require a lot of discipline and working together over a long period of time.”
The key will be how quickly it can execute its hiring plans and attract bankers of the calibre that Deutsche needs. The bank has recruited seven managing directors to its North American business, where Cryan is personally overseeing the rebuild.
Warren is happy with the level of engagement he is seeing in Europe. “When I’ve been hiring people, I’ve found it extraordinary how easy it is to engage with the best people from the best platforms. The level of frustration in our industry is high because it isn’t growing very quickly.”
Deutsche has lost ground over the last two years as it has struggled to deal with two problems — fines for past misconduct and a lack of capital compared to its peers.
With Deutsche paying $7.2bn to resolve a US investigation into its activity in the CMBS market at the end of last year, and completing a $8.5bn capital raising in March, it hopes it has resolved both of those issues.
“Most people find Deutsche a pretty interesting place to contemplate now that we’ve removed the two biggest perceived risks,” says Warren.
At the same time, it has restructured its business and made it less complex, including cutting a long tail of clients and focusing its global coverage effort around a smaller number of profitable ones.
Dodging the Deutsche doughnut
All of this has come at a cost, with bankers foregoing their bonuses this year following the US Department of Justice settlement. That has affected morale so Warren and his colleague also face a battle to retain staff as much as they do to to recruit new joiners.
Refreshing the engine room will be a good start but the true test will be whether the bank can come good on its pledge to pay the market rate next year. It’s the same ‘trust me’ moment that Cryan oversaw while he was CFO at UBS when it paid no bonuses.
Deutsche has emerged from its darkest period and now has a strategy and a path to execution. It is remoulding itself as a client-driven organisation.
“Our intention is that we will be deploying more of our capital towards corporate clients," says Warren. "That doesn’t mean we’re getting out of the markets business, it just means the relative weighting is more towards corporates and client-driven, long-term, relationship-based capital exposures rather than facilitating counterparty trades.”
Given its historical status as a flow monster, this shift away from short-term intermediation to long-term relationship building is where the real change is taking place.