Investment banking: Does Deutsche’s fightback begin in Asia?
Putting a career transaction banker in charge of Deutsche Bank’s business in Asia made some sort of statement. But of what, exactly? That Deutsche’s old markets powerhouse is no longer in the driving seat? Or that it can be a model for the revival of Deutsche globally?
Deutsche Bank CEO John Cryan makes no secret of Asia’s importance in putting some of the worst years in its recent history firmly in the past.
Regulatory scandals, capital problems and strategic headaches at home and in the US have taken their toll on Deutsche’s reputation and finances, with fines exceeding a total of $10.5 billion since April 2015. But the bank has had a relatively trouble-free time of it in Asia, a region offering political stability and good growth prospects.
Little wonder that Cryan, who has had enough fires to fight in Europe and the US to last a lifetime, considers Asia “absolutely critical”, as he told staff at a town hall meeting in the region in February.
“For John Cryan, Asia is a growth market,” says Werner Steinmueller, Asia Pacific CEO for Deutsche Bank. Steinmueller’s own appointment, announced in July, was intended to be important in this respect: the first Deutsche Bank board member to be based in Asia.
So, Deutsche’s Asia business matters. But is it any good?
Deutsche has had to navigate its way through a tricky operating environment in which investment banking volumes are increasingly appropriated by mainland Chinese players and it is ever-harder for the multinationals to make a buck. It has had to do so at a time when bonuses worldwide, Asia included, have been cut because of the bank’s multitude of North American and European regulatory fines.
Several prominent bankers have left Deutsche over the last year, prompted by a mixture of zero bonuses, doubts about the overall bank or simply a desire to leave investment banking outright.
Clients in Asia, from private banking to global markets, were spooked by problems elsewhere in the world and their confidence has had to be won over afresh. The issue of confidence shows up in the annual surveys where clients vote. Although Deutsche continues to lead our annual trade finance survey in the Asia category, it dropped from first to second place in Asia in Euromoney’s 2016 FX survey for overall market share. In our cash management survey, Deutsche fell from fourth to sixth place in 2016 for non-financial institutions in Asia.
Rivals speak of a bank that just isn’t as visible as it used to be. Some are scathing. At a recent meeting with a senior regional investment banker in Hong Kong, Euromoney ran through the competitive environment. Deutsche was not even mentioned by the banker. When asked why, he raised an eyebrow and asked pointedly: “Are they even still here?” In a market where rivals’ views play an important part in the perception of an institution among clients as well as peers, such comments sting.
More generous competitors concede that Deutsche is still a meaningful player but that, particularly in headline areas such as debt capital markets, it will have to be aggressive – low fees, high compensation – to get back to where it was.
Assessing the accuracy of that impression requires a closer look at the Deutsche model, in which the behind-the-scenes stuff that never appears in the league table has always been a big driver of revenues.
We are absolutely committed to it. It’s a growth business. Our aim is to have extraordinary growth, to move from about top 10 to top five - Werner Steinmueller, Deutsche Bank
For a start, it is important that Steinmueller is not only a board member, not only a German at the bank’s heart whose career at Deutsche spans 26 years, but that he was head of global transaction banking. Staff in Asia inferred a number of things from his appointment. First, an intent to show Asia’s importance to distant Frankfurt; second, to give it representation on the all-powerful Vorstand, or executive board; and third, to demonstrate just how important the transactional side of banking is, and will continue to be, for Deutsche.
To Steinmueller, it’s always been this way. Meeting Asiamoney in Hong Kong’s ICC tower in Kowloon – the view over the harbour, he notes enthusiastically, is a bit different to looking at the River Main in Frankfurt – he starts out by talking about Deutsche’s history, going back to 1872 in Shanghai.
“The job of Deutsche back then was support for German industry and exports, and today you can see much is the same,” he says. “Transaction banking, which I was running until August 1, is one of the sweet spots in Deutsche Bank. And when you have transaction banking, you have daily contact with a client. You talk about their strategy.”
Asked for a point of differentiation between the Deutsche model in Asia and its peers, this is what he points to. “There are only two or three others who can truly say they have transaction services linked to investment banking, and to have it in depth in local markets in the region as we do,” he says in what would appear to be a tacit nod to Citibank and HSBC.
He sees it as a magnet for other business. “Corporates, institutional clients, sovereign wealth funds: we come up with creative solutions for all of them – for foreign exchange, for risk management, for interest rate structured solutions – and they all also need the services of transaction banking. We don’t want to focus on retail, or SMEs, or credit cards. We stick to our client segment and we stick to our 15 markets.”
Transaction banking is steady and appealing, but the long-standing engine room of Deutsche in Asia is its markets business. Visitors to the Singapore office at One Raffles Quay are often shown the trading floor, the biggest of any foreign investment bank in the country and the heart of a business that usually brings in half the bank’s revenue for the whole region. The man most commonly credited with building it up, Boon Chye Loh, is now the head of the Singapore Exchange.
“The markets business is the biggest contributor to the bank’s overall revenue in Asia Pacific,” says David Lynne, co-head of global markets and head of fixed income and currencies for Asia Pacific. In the 2015 annual report (the 2016 numbers were not available as Asiamoney went to press), CB&S, the corporate banking and securities businesses unit that includes both global markets and investment banking, accounted for 66% of all revenues from Asia.
Steinmueller breaks it down. “Markets is still the biggest engine,” he says. “To give you some indication, roughly half our revenue comes from the markets business. Profitability is largely in line with that as well.”
CB&S, whether driven by markets or investment banking, has been a reliable performer for Deutsche in Asia – the division’s net revenues were up 11.2% year on year from 2014 to 2015, when the same business shrank in every other reporting bloc worldwide bar the UK – but is likely to show a tougher time when the 2016 numbers come out.
“We clearly had some challenges last year,” says Lynne. “Deutsche Bank was in the press every day, and we had issues around counterparties and clients’ credit concerns. Certainly that had a drag on business last year across the platform.”
According to research by Coalition, Deutsche fell from first to third place in Asia fixed income in 2016.
|Illustration: Pete Ellis|
But Lynne is adamant the worst is over. “What we saw in Asia Pacific was clients and counterparties were a bit quicker to leave us – which is reasonable, given they are a long way from Europe or the legal actions in the US – but they have also come back a bit quicker post the DoJ settlement. That’s still a work in progress that will occur throughout this year, across prime brokerage balances in equity, listed clearing balances and everything else, but there has definitely been a strong upswing of people coming back to us in the last two months.”
Matters weren’t helped by German banking regulation around total loss absorbing capacity, or TLAC, “which changed our senior debt rating process versus every other bank in the world. Getting people at a senior level to understand that in large-scale clients is not too difficult, but getting a board change of approval, maybe the trustee of a fund, takes longer.”
Bankers have dealt with it by getting out there and trying to win clients over afresh. “A key part of it is coverage officers, relationship managers and people like myself meeting clients,” Lynne says.
Nevertheless, the global markets business remains at the heart of what Deutsche is about in Asia. Numbers change from year to year, but it’s a roughly equal three-way split between equities, the credit trading business, and fixed income and currencies, which embraces everything from government bonds to derivatives to foreign exchange. Deutsche remains entrenched across the region, with licences and headcount in place, and Lynne believes it is well positioned for several long-term trends.
On his side of the business, the debt platform, he sees three components driving activity. “We have an import of global savings, so big international accounts investing in Asia; we have a big export of savings from this region, particularly from north Asia, where Japan, Korea and Taiwan are increasing buyers of international fixed income product, driven by low domestic interest rates and a lack of available product in local markets; and domestic businesses, such as private banks buying Asian product locally.”
The steady rise in pension funds that need to be allocated will be a long-term trend, already clearly in evidence in Taiwan; Lynne returned from Australia the day before our meeting and believes superannuation money is increasingly seeking a home directly in overseas debt too. India, viewed across all business lines, is also believed to be the most profitable country for Deutsche in the region, thanks mainly to markets and transaction banking.
That’s the asset side. Then, on the liability side, the foreign exchange business remains strong, tightly linked to Steinmueller’s much-loved cash management and trade finance operations, both for western multinationals coming in to Asia and large-cap Asia-based multinationals looking outwards.
But the mechanics of the business are changing, and Lynne speaks of a bifurcation taking place. On one side comes the tech-led mass-production repeat business.
“Increasingly the deployment of technology allows you to build a very standardized processing engine and go more upstream to the client,” he says. “That might be linking into the payment engine or the custody, or giving clients more automated self-service in their banking needs.” On the other side, he says, “is a bespoke solution business: structured finance solutions, more quantitative investment solutions, or an advisory piece on an M&A deal. That’s the way the world has gone.”
Investment banking, where the league tables are visible and endlessly dissected, is where the competition tends to say they don’t see Deutsche as much as they used to, though a look at numbers commissioned from Dealogic shows that this depends very much on the asset class. Deutsche actually had a good year in equity capital markets last year, ranking fourth with 54 deals worth $11.7 billion. Those deals included the largest-ever convertible transaction, the $6.6 billion deal from SoftBank into Alibaba last June, as well as the ICICI Prudential Life Insurance IPO, the biggest in India for six years.
Now we are back, and what is very important and what we are seeing is that we get strong inflows back as well - Werner Steinmueller
At first glance, DCM looks far weaker; the bank ranks just 25th in 2016, although here one has to recall that all international banks have plunged down the league tables as Chinese issuance led by mainland bookrunners and their international offshoots has dominated.
“We’ve skewed that business over the last couple of years to more of a fee focus than a league table focus,” Lynne says. This is often the fallback position of any bank falling in debt league tables, but Lynne is at least able to point to Deutsche’s position on a number of high-yield bonds, particularly from China, in the first two months of the year, of which Future Land is a recent example.
He also highlights Deutsche’s leadership in the formosa bond market in Taiwan, where it has so far been on every corporate deal this year; recent issues have included Apple, Comcast, Verizon and Vodafone. Lynne says there are three or four big multinationals in the pipeline: “Size varies by credit rating, but the main deals are in the area of billion-dollar tickets.”
Within the investment bank, insiders tend to argue that they are just boxing clever. Rather than commoditized low-fee deals, they say, they have built particular specialisms: liability management transactions, for example, which last year ranged from the Republic of the Philippines to Lippo Karawaci, China Oriental to Indiabulls; high-yield, of course; and sponsor-led transactions, particularly in India and Australia, the $405 million acquisition financing for Mphasis being a good example.
Much like Credit Suisse – there are quite a few similarities, in fact – Deutsche tends to get involved in more structured lending, such as the $200 million bank guarantee-backed term loan for Vietnam Investment Group that introduced the SBLC structure into Vietnam, or a distinctive cross-border guarantee structure that allowed Wanda Commercial to get a $500 million offshore syndicated loan away. Deutsche does still get on some of the bigger deals, like Indonesia’s euro-denominated sovereign bonds, but says the money is in the more arcane and specialist stuff.
The weak point is perhaps advisory, where the bank ranked 13th last year, compared with sixth as recently as 2014.
“To tell you the truth, we are making great progress on advisory,” says Steinmueller. “But I want to see more progress and expect outsize growth from this segment.”
Given the bank’s thirst for capital at a group level, there had been rumours that the Asia wealth management business might find itself up for sale.
With $45 billion under management, it is just shy of the $50 billion that wealth management leaders tend to see as a minimum scalable amount for banks, given the huge compliance costs now involved, and it would doubtless have had no shortage of willing buyers, with Singapore’s DBS and OCBC taking turns to pick off European private banking arms in the region in recent years.
Steinmueller dismisses the idea of a sale: “We are absolutely committed to it. It’s a growth business. Our aim is to have extraordinary growth, to move from about top 10 to top five."
Currently, DBS is thought to occupy fifth position, with $117.69 billion equivalent under management at the end of 2016, or more than double Deutsche’s figure.
Like many others, most recently JPMorgan, Deutsche is now only active in the ultra- and super-high net-worth sectors – in other words clients with at least $10 million in assets – and believes this ties in well with the broader business, again like Credit Suisse.
|Werner Steinmueller, Asia Pacific CEO
for Deutsche Bank
“Here we can use our technologies for markets and products for Asia family businesses,” says Steinmueller. “Take the real estate tycoons here in Hong Kong: we are dealing with them on both sides, on the wealth management and the markets side, conducting complex real estate financing as well as taking care of the private money. This is a strong linkage where all that we offer comes together.”
This is, though, an area where Deutsche’s broader reputational problems have caused ripples in Asia.
Asked what impact problems at home have had in the region, Steinmueller says: “It affected us in the fourth quarter, no doubt, as people asked a lot of questions.” But he claims that’s over. “Nobody asks about our standing, our credibility, our liquidity position now. Since the key litigations, we have had a lot of positive announcements from the bank about what we want to do. Now we are back, and what is very important and what we are seeing is that we get strong inflows back as well.”
Asked if the bank had quit any businesses in Asia in 2016, Steinmueller says only the stake in the mainland bank Hua Xia, which was sold to PICC Property & Casualty. “That was a good investment, and it was the right time for us to exit,” he says. At the time of the interview, Deutsche still hadn’t got all the money out of China from the sale, though it has now done so.
Deutsche retains its China JV, Zhong De Securities, though it has not yet taken up the option to increase its stake from 33% to 49%, perhaps because this is not an ideal time for a bank that posted a $2 billion loss in the fourth quarter to invest more into a Chinese venture. “With our JV, we keep optionality,” Steinmueller says.
Arguably a stronger business is Deutsche’s asset management venture on the mainland, Harvest Fund Management, of which it owns 30%. “You have to constantly look at what’s possible and what’s not possible in China; when liberalization comes, you have to be there,” says Steinmueller.
Steinmueller is keen to get across the message that Deutsche has survived the storm and now, by doing things right, the bank will recover lost ground: “We are back in the game.”
Where’s the money?
Deutsche’s problems have a lag when it comes to remuneration. Even if the bank has turned the corner under Cryan, bankers are mostly not receiving bonuses, and it is inconceivable that this cannot but affect the bank’s standing in the hiring markets.
“I come across a lot of bankers at Deutsche in Asia who are resentful that problems caused by idiots in Europe mean they don’t get a bonus this year,” says one headhunter. “There is a feeling that they are being penalized for mistakes they personally didn’t make, and I have a lot of sympathy for that point of view.”
Werner Steinmueller, Asia Pacific CEO, has a quick and rather predictable response to this. “I will quote our CEO: if you are considering leaving Deutsche because you lost trust and confidence, you should have gone two years ago, because we are absolutely on the right track now.”
But what if you are considering leaving Deutsche because you lost the money you thought you were going to get?
“Every bank, when you look back over the last three or four years, has had periods of difficulty where it was not so great on the bonus front,” Steinmueller says. “It’s not that we have paid no bonus – we have paid retention to the key people. I checked the January attrition figures [of people leaving], and it’s below last year, when we had bonuses.”
The week before our meeting, Steinmueller was in Australia, where he told staff that bonuses would be back, and he now confirms this will be the case across Asia and indeed across the whole bank: “We sent to every employee a note signed by each board member that we are planning for 2017 a normal bonus round.”
In the good years, Deutsche was among the most generous names in the industry for bonuses: Christian Bittar, who later ended up at the heart of investigations into rigging Libor, is said to have earned a bonus of $90 million in 2008, the year he was made global head of money market derivatives trading in Singapore (though some of that was likely clawed back when he was dismissed three years later).
Even aside from the money, there’s no question that the last few years, and the last few months in particular, have been exceptionally difficult for Deutsche bankers who weren’t involved in the many damaging scandals.
“Last year was hard work,” says one senior banker. “Every day you’re on the front page of the newspaper and you need to call another client and speak to another regulator. You need to keep your staff focused not on Bloomberg and the stock price but on the business. It was a slog.” Still, there is a feeling internally that Deutsche was just late to a process the Americans had already gone through. “There are multiple other firms that have been through that process. We’re just the last.”
Deutsche has lost people, there’s no question. For a start there was Gunit Chadha, whose departure as Asia CEO precipitated Steinmueller’s arrival in the region, and who now heads a unit of private equity firm Everstone Capital. Ravi Raju, the head of Deutsche’s Asia-Pacific wealth management operations and a well-known name in the industry, jumped ship to UBS with team members including Anurag Mahesh, global head of key client partners. Michael Ormaechea, head of Australia and head of global markets for Asia Pacific, left in February, though this appears to be to seek a quieter life after 22 years at the bank.
Other departures over the last year have included Guillaume du Cheyron, head of high-yield bond origination and execution for Asia, whose LinkedIn profile lists his current place of employment as “Sailing from Saint Tropez to Sydney” on a 48-foot yacht called Inspiration; Pei Shen Chou, head of China M&A, who also went to UBS; Sumeet Puri, head of ECM syndicate for Asia, now at Samaya Capital; and two of his team, Hemant Sabherwal, who is now head of global capital markets at Union Gaming Securities, and Yeone Fok, who went on to found the crowdfunding business SparkRaise.
Still, a look at that list shows that only a few such as Pei Shen Chou, Ravi Raju and his team, moved to a natural competitor, while others went on to do something different, be it a smaller securities player, crowdfunding or a yacht. “This is happening a lot, not just at Deutsche,” says a headhunter. “People realize that the long hours aren’t going to get them the money they once dreamed of and they think it’s time to make a change.”
It’s also fair to say that there has been plenty of activity through the in-door too, and often from bulge bracket competitors. Puri was replaced as head of ECM syndicate by Simon Galvin from Goldman Sachs. Ed Tsui, head of Asia debt syndicate, was poached from JPMorgan in July. James Boyle, who with David Lynne has been named co-head of global markets to replace Ormaechea, was hired last year from Citi, originally as global co-head of equity derivatives. Mohamed Atamani was hired from UBS to be head of financial sponsors for Asia Pacific.
“Even bankers can occasionally look more than a year ahead,” says one headhunter, who says he doesn’t know if those hires came with guaranteed bonuses attached but assumes they must have done. “If you join Deutsche now, it’s a long-term view that the worst is over and Cryan will eventually turn it around.”
Steinmueller says there is no hiring freeze and no curb on investment.
“You should always upgrade people,” he says. “We are not going into new segments but we are hiring.” Deutsche’s headcount in the region won’t be revealed until the annual report is out, but it increased steadily from 2013 to 2015, reaching 20,144 in Asia out of 101,104 worldwide on December 31, 2015. Steinmueller urges caution about reading too much into that because of the use of insourcing and outsourcing. It is thought to have about 10,000 people in these business areas, as opposed to in operations centres such as those in India and the Philippines.
“We have lost very few people. Most of our staff have been sensible and quite pragmatic, and there’s been an intelligent conversation,” Lynne says, adding it would be strange to go now. “Our pitch to the employees broadly is: ‘Now we’re on the upswing. If you sat through the last two years, then I wouldn’t leave now.’”