income before income taxes, more than doubled versus 2013
»Deutsche Bank is now a stronger, safer, better balanced and more responsible bank.«
For the banking industry, what sort of year was 2014?
Fitschen: ― 2014 was a year of challenges for banking and for Deutsche Bank. In the global economy, we continued to see a “three-speed world”, with leading Asian economies growing strongly and recovery in the U.S. economy accelerating, contrasted with weak growth in the eurozone. Interest rates remained at historically low levels, and regulation of our industry continued to intensify, particularly in connection with capital and leverage. Banks around the world sustained their efforts to resolve legacy litigation matters, and the costs associated with these efforts reached unprecedented levels. In addition, 2014 saw the rise of geopolitical uncertainties, including conflicts in Ukraine and the Middle East. Those uncertainties are still with us today.
Against this backdrop, how did Deutsche Bank perform in 2014?
Jain: ― Financial performance improved significantly despite the tough conditions Jürgen described. Revenues were € 32 billion, essentially stable versus 2013. Profits grew significantly: Income before income taxes rose from € 1.5 billion in 2013 to € 3.1 billion, while net income rose from €681 million in 2013 to € 1.7 billion. This development reflects the robust performance in our core businesses, a reduction in provisions for credit losses and lower charges relating to legacy litigation matters.
What characterized the performance of Deutsche Bank’s core businesses?
Fitschen: ― In 2014, for the first time ever, all four core businesses produced pre-tax profits of over € 1 billion each – that’s a landmark achievement! This contributed to a good balance of earnings between our investment banking business, Corporate Banking and Securities (CB&S), and our other core businesses: Private & Business Clients (PBC), Global Transaction Banking (GTB) and Deutsche Asset & Wealth Management (Deutsche AWM). CB & S pre-tax profits were resilient under challenging conditions at € 3.3 billion, while our other core businesses contributed combined pre-tax profits of € 3.6 billion – that’s an increase of approximately 50 % since 2012, the year we launched Strategy 2015+.
In the individual businesses, what drove this performance?
Jain: ― CB&S outperformed, gaining market share despite a simultaneous reduction in leverage. PBC performed well in a difficult environment: Revenues were on a par with 2013 despite low interest rates, but profitability was impacted by charges for the reimbursement of loan processing fees and platform investments. GTB faced challenging conditions in Europe but used its global reach to grow business volumes and revenues in the Americas and key Asia Pacific markets. In Deutsche AWM, our intensive restructuring started to pay off: Pre-tax profits exceeded € 1 billion, while assets under management surpassed € 1 trillion, thanks partly to four consecutive quarters of net new money inflows. That’s a turnaround after the outflows of previous years and a vote of confidence from our clients.
Capital is a key element of Deutsche Bank’s strategy. What progress did we make in 2014?
higher common equity
Fitschen: ― We acted decisively on capital during the year, raising € 8.5 billion of common equity in June. By the end of 2014, our fully-loaded Common Equity Tier 1 ratio was 11.7 % – up from 9.7 % at the beginning of the year, and this ratio has nearly doubled since early 2012. In addition, we made progress in reducing leverage exposure, notably in the fourth quarter, and this helped us improve our leverage ratio to 3.5 % by the end of 2014. Furthermore, we raised € 4.7 billion of Additional Tier 1 capital in two tranches during the year, which met healthy demand from investors and brought us close to achieving our target of € 5 billion more than a year in advance.
In 2014, the European Central Bank, as the new European banking regulator, carried out a Comprehensive Assessment of around 130 eurozone banks. How did Deutsche Bank fare?
Jain: ― This exercise was a two-fold validation for Deutsche Bank. The ECB’s Stress Test showed that Deutsche Bank possessed one of the largest capital buffers of any eurozone bank in the stress scenarios, even before factoring in our capital increase in June. Furthermore, the Asset Quality Review confirmed the quality of the bank’s asset base.
»We are intensifying cooperation across our businesses to present one bank to our clients.«
Digitalization is changing the way we bank. Is Deutsche Bank responding?
invested in digitalizing the bank
Fitschen: ― Definitely. In PBC, for example, we aim to offer private customers a seamless, multi-channel experience that combines branch service with online access. In 2014, we announced investments of € 200 million to digitize our retail platform. We are making it easier for customers to reach us online, for example, with innovations such as fingerprint log-in. During the year, we registered approximately one billion customer log-ins to access information or carry out transactions via PCs, laptops, tablets or mobile phones – that’s up by almost 50 % since 2012.
Deutsche Bank aims to put clients at the core of its organization. How are you doing that?
Jain: ― In several ways, for example, by intensifying cooperation across our businesses to present one bank to our clients. In 2014, CB&S and Deutsche AWM formed a Corporate Finance Partnership to serve clients they have in common. CB&S and GTB announced investments to enhance coverage of large multinational corporations in the U.S. and made substantial progress with this cooperation during the year. Teamwork between Deutsche AWM and PBC to develop business opportunities led to around 3,000 joint sales initiatives, while our dedicated service for Germany’s Mittelstand attracted both new clients and new business volumes last year.
»Deutsche Bank faced multiple challenges: a fragile eurozone economy, persistently low interest rates and changing regulation.«
You have stated that cultural change is crucial to restore trust in the banking industry. Did Deutsche Bank sustain that effort in 2014?
Fitschen: ― We certainly did. We continued our investments to reinforce our Three Lines of Defense against conduct-related issues, and since we launched this initiative we have added some 700 people to the control units in our businesses. In CB&S, we established our Conduct and Control Group and put some 6,000 people, around 90 % of our CB&S staff, through dedicated compliance and risk culture workshops. In Germany, around 400 Managing Directors, approximately 90 % of our total, have now completed two-day seminars organized in cooperation with the Cologne Institute for Economic Research. We completed more than half a million compliance and risk culture training sessions, a third more than in 2013. We strengthened our governance structure by adding specific Management Board responsibilities for litigation and legal matters and by electing new members to our Group Executive Committee with dedicated responsibilities for compliance and regulatory affairs.
Is cultural change altering the way Deutsche Bank does business?
Jain: ― Absolutely. CB & S, for example, restricted the sale of complex derivative products to specific client segments and discontinued business altogether with some clients where we saw potential reputational risks or where the business was not aligned to our values. In addition, we scrutinized over 1,250 potential transactions for possible environmental or social risks during 2014 – nearly double the number in 2013, and we reaffirmed our clear policy on potential transactions that may impact UNESCO World Heritage sites.
Turning to costs: What progress did you make in 2014?
in cost savings in 2014 from the OpEx program
Fitschen: ― Our Operational Excellence (OpEx) program made good progress during the year, delivering cost savings of € 1.3 billion. By the end of 2014, cumulative OpEx savings stood at € 3.3 billion, around € 400 million ahead of the end-of- 2014 target. However, costs rose in some specific areas. The bulk of these related to changing regulation: adjusting our pay mix and adapting our platform to comply with new regulations and reporting requirements. Additionally, we continued to invest in our platform. These cost increases more than offset OpEx savings during 2014. We are not satisfied with our progress on costs, and we are determined to address this issue.
What other challenges did you face during the year?
Jain: ― Deutsche Bank faced multiple challenges: a fragile eurozone economy, persistently low interest rates and changing regulation. Litigation expenses, while lower than in 2013, continued to materially affect profitability. Our Non-Core Operations Unit (NCOU) has successfully reduced non-core assets by around € 100 billion, or 72 %, since its formation but continues to negatively impact our bottom line. As a result of all these factors, returns to our investors are not yet where they should be. Boosting these returns is a priority for us.
To sum up: Where does Deutsche Bank stand today?
Fitschen: ― We are well aware that we still face challenges on the road ahead, but we believe it is important to look back at the road we have travelled since 2012. We have nearly doubled our core capital ratio, cut our balance sheet by nearly a quarter, or over € 500 billion, achieved robust performance across all four core businesses, invested significantly in infrastructure, systems and controls, and committed ourselves irreversibly to cultural change. Quite simply: Deutsche Bank today is a stronger, safer, better-balanced and more responsible institution. We are grateful to all our Deutsche Bank colleagues for their efforts on the journey so far.
What comes next?
Jain: ― We are now working diligently on the next phase of our strategy. We are making a rigorous assessment of our progress so far – achievements and challenges. We are also analyzing the operating environment and asking: How have the global economy, interest rates, regulation and customer needs evolved since 2012? We will then assess the implications of this analysis both for our individual businesses and for our platform as a whole. We are looking forward to communicating more details to our stakeholders.
Frankfurt am Main, March 2015