pre-tax profits in the core bank
»In 2013, Deutsche Bank made significant progress in implementing Strategy 2015+«
What challenges did Deutsche Bank face in 2013?
Jain: — Deutsche Bank faced a number of challenges during 2013. The global economy continued to recover, but at different speeds: growth in the U.S. and Asia Pacific was significantly stronger than in Europe. Interest rates remained very low, as many governments and central banks around the world continued to provide stimulus by pumping liquidity into their economies. Business volumes in some businesses were muted, and many clients remained risk-averse despite stronger equity markets. Regulation of the banking industry continued to tighten with a renewed focus on leverage and, more recently, structural reform. Additionally, the banking industry was confronted with significant litigation costs relating to issues which arose in past years.
Against this backdrop, how did Deutsche Bank perform?
Fitschen: — Group pre-tax profits for 2013 were up by 79 % to € 1.5 billion, while the core bank reported pre-tax profits up 27 % to € 4.8 billion. While we’re pleased with the year-on-year improvement, we’re not satisfied with this level of profitability. We have the potential to deliver more for our shareholders, and Strategy 2015+ is designed to deliver that potential.
€ 4.8 billion
Jain: — It’s important to consider the factors that drove these results. Our reported profits reflect the impact of specific charges related to implementing our strategy: the cost of derisking in our Non-Core Operations Unit or NCOU, investments in our Operational Excellence Program (OpEx) and charges to resolve major litigation issues. These effects, along with some specific accounting adjustments, together reduced pre-tax profits by € 7 billion in 2013.
Taking account of these factors, what about the underlying core business?
Fitschen: — Adjusted profitability in our core business was close to its strongest ever, at € 8.4 billion. We achieved this with a leaner platform: We reduced assets, risk-weighted assets and costs substantially from their peak levels. In addition, we improved the balance between investment banking and non-investment banking earnings, thanks to growth in Private & Business Clients (PBC), Global Transaction Banking (GTB) and Deutsche Asset & Wealth Management (DeAWM). Together, these non-investment banking businesses accounted for around half of our operating profitability in 2013. In other words, Deutsche Bank produced one of its strongest-ever operating results with a leaner, safer and better balanced business.
Have you made Deutsche Bank safer?
Jain: — Yes! In the financial crisis, banks got into difficulties either from a lack of liquidity or a lack of capital. We’ve strengthened DB against both. Our Common Equity Tier 1 capital is now significantly higher than early 2012. In addition we have transformed the quality of our funding base, which now consists predominantly of the most stable sources of funding.
How did DB’s core businesses perform in 2013?
Fitschen: — All businesses did well in challenging conditions. CB&S delivered solid profitability and good returns despite ongoing restructuring. While 2013 was a challenging year for fixed income, we saw good momentum in both equities and corporate finance, and we’re committed to maintaining our world-leading investment banking franchise. PBC’s operating profit grew despite ongoing low interest rates, and we made progress on three major initiatives – integrating Postbank, building a common operating platform, Magellan, and launching a new Mittelstand initiative. GTB turned in robust operating profit growth with good cost discipline despite low interest rates and a challenging environment in our core European market. DeAWM produced record operating profit with both revenue growth and cost savings as we reap the benefits of integrating five business units into one.
We’re now nearly halfway through Strategy 2015+...what does the “scorecard” look like?
Jain: — We’re making solid progress on all our key objectives. We’ve strengthened our Common Equity Tier 1 capital ratio from below 6 % in early 2012 to 9.7 %. During 2013, our leverage ratio improved from 2.6 % to 3.1 %. In respect of costs, OpEx has so far delivered savings of € 2.1 billion – that’s half a billion ahead of our 2013 year-end target.
€ 2.1 billion
in cumulative OpEx savings
Our core businesses have returned solid operating profitability and sustained strong customer franchises while dealing with the twin challenges of significant reconfiguration and a challenging operating environment. We have reconfigured our businesses more closely around the needs of our clients, for example by transferring some 10,000 German Mittelstand clients to our dedicated private and commercial banking platform and by creating an integrated, full-service asset and wealth management offering.
Fitschen: — Last but certainly not least: We laid solid foundations for cultural change. We launched new values and beliefs, strengthened our control environment and put some legacy litigation matters firmly behind us. We’re under no illusions. We know cultural change is a long-term, multi-year effort; but we are on the right track.
How is the Operational Excellence Program meeting its objectives?
Jain: — OpEx has saved money by buying smarter, putting the right people in the right locations and reaping the benefits of a more efficient platform. For example, we eliminated 1,200 IT applications – over 20 % of our total – and identified another 1,100 for decommissioning; we cut our number of vendors by around 18,000 or nearly one in four; and we disposed of over 60,000 square meters of office space.
Fitschen: — OpEx is also about building a world-class platform. We are investing some € 1.4 billion in integrating business platforms, around € 700 million to consolidate and standardize systems, around € 600 million to create a more effective organization. And we’re spending a further € 200 million to automate and simplify processes.
What difference does cultural change make in everyday practice?
is already transforming our everyday business
Jain: — Cultural change is visible in numerous aspects of our day-to-day activity. For example, for our most senior leaders, we have extended the vesting period for deferred compensation awards from three to five years with strict clawback provisions. That aligns rewards with longer-term performance more than short-term gain. In 2014, we will change the way we assess people for bonus and promotion, taking into account our new values and beliefs.
Fitschen: — We have also strengthened our control environment. We’re investing around € 1 billion until 2015 to adapt our systems to new regulation and are hiring more people into our Compliance function. We have made key appointments, including a Chief Control Officer and a Chief Governance Officer. We also launched a special initiative, reporting directly to us, to further reinforce our control model across businesses, control functions and Group Audit – our three lines of defense against control deficiencies.
Deutsche Bank faces litigation arising from legacy issues. What’s the current status?
Fitschen: — During 2013, we put two major legacy issues behind us: the European Commission’s probe into IBOR – Interbank Offered Rate – and litigation with the FHFA – Federal Housing Financing Agency – related to mortgages in the U.S. We also recently reached a settlement with the Kirch Group which ends all legal disputes between the parties in this long-standing and well-known legacy matter. In certain other cases, we successfully contested litigation brought against the bank. In the remainder of 2014 we will continue our efforts to resolve legacy litigation issues.
Looking ahead, how do you see the year 2014?
we will make further progress on reconfiguring our businesses
Jain: — We see 2014 as another year of challenges and of disciplined implementation of Strategy 2015+. We will make further progress on reconfiguring our businesses, strengthening our infrastructure and elevating our systems and controls to best-in-class. We anticipate cumulative savings from OpEx to approach € 3 billion, and further investments of some € 1.5 billion into OpEx. In addition, we aim to build on our momentum in making decisive progress toward our leverage reduction target.
Fitschen: — In 2014 we must also respond successfully to new regulations, including the asset quality review and the stress test implemented by the European Banking Authority, and the transition to a single EU banking regulator.
»We aspire to be the leading client-centric global universal bank, and we reaffirm that vision.«
And what about 2015 and beyond?
Jain: — We are confident that in 2015 we will see the benefits of the progress we have made so far, and will continue to make in 2014. We are extremely grateful for the focus and discipline of our staff and for the commitment they have demonstrated and continue to demonstrate in implementing our strategy.
Fitschen: — Completing Strategy 2015+ will leave Deutsche Bank well positioned to capitalize on future long-term trends. In the global economy, we continue to see dynamic growth in the world’s emerging markets. This favors a small number of banks with a truly global network, franchise and expertise. Deutsche Bank is one of them. As demographics in many important markets shift toward an ageing population, savings and retirement solutions will become increasingly important. Here, too, we have unique advantages as a global, fully-integrated asset and wealth manager.
Jain: — Technology is transforming the way we reach our clients. More than ever, they connect with us through smartphones, laptops and other mobile devices. This is an opportunity we are determined to grasp. Our industry is consolidating in both the U.S. and Europe, and this trend will continue. Deutsche Bank is uniquely poised as a consolidator, particularly in Europe.
So Deutsche Bank’s strategic vision remains unchanged?
Fitschen: — Absolutely. We have made significant progress so far, and we’re confident that we will build on that momentum, deliver Strategy 2015+ and position Deutsche Bank as a winner in the post-2015 environment. We aspire to be the leading client-centric global universal bank, and we reaffirm that vision. We stay the course.
Frankfurt am Main, March 2014