A top Deutsche Bank executive has sought to calm fears that a merger with Commerzbank would harm clients and hurt revenues, addressing one of the big concerns of investors.
In rare public comments from a top Deutsche executive on repercussions of a potential deal, the bank’s head of global transaction banking argued against concerns that a deal with Commerzbank would destroy value because overlapping corporate clients would be forced to switch to other providers to avoid overexposure to one counterparty.
“Clearly, there are plenty of German corporates that both us and Commerz lend to and any treasurer would think, ‘will their appetite change?’” Stefan Hoops said in an interview at Deutsche’s Frankfurt headquarters. “What I can tell you is, it won’t. We don’t have any large-lending limit issues; we have plenty of room to lend to pretty much anybody.”
Mr Hoops acknowledged foreign banks have already started trying to poach business from midsized German companies that work with Deutsche and Commerzbank after they began merger talks in mid-March. Their rivals have been saying the combined entity will have to jettison clients and be distracted by years of integration.
Mr Hoops strongly disputed their claim. “It’s quite important for corporates to understand that one plus one will equal two, even though some ‘helpful’ French or US banks hope that’s not the case,” he said.
Overlapping clients “would get twice the attention going forward,” he said. “I don’t want to lose any revenue” or “cut lending in case of a transaction”.
Irrespective of whether the merger goes ahead, Mr Hoops, who was named head of global transaction banking in October, has ambitious plans to double profits at what he called Deutsche’s “crown jewel”.
He wants to boost pre-tax earnings from handling corporate payments, cash management and trade finance from €1bn to €2bn in the next two and a half years. “The clear ambition is to get to €5bn in revenues . . . while keeping costs in line,” he said.
Mr Hoops’ plans are aggressive considering recent performance. His division suffered a 13 per cent drop in revenues over the past two years, generating €3.8bn in 2018. He needs to outgrow the market, which industry monitor Coalition forecasts will expand 6 per cent a year.
Recent declines are linked to a sharp reduction of Deutsche’s correspondent banking network — which provides services such as clearing of US dollars for smaller regional lenders — for compliance reasons.
Deutsche is under fire for its role as a correspondent bank for Danske Bank’s Estonian branch, which is at the centre of a huge money-laundering scandal. Between 2007 and 2015, the German group cleared €160bn for the branch.
Since cutting ties with Danske Estonia in 2015, Deutsche has slashed two-fifths of its transaction banking relationships, which lowered GTB revenue by hundreds of millions. This was necessary because money laundering was “the biggest risk we have in our business model,” Mr Hoops said. A new automated, AI compliance system “would spot Danske much earlier today”, he added.
There are not many parts of Deutsche’s investment bank earmarked for growth, but chief executive Christian Sewing has singled out the GTB as a cornerstone of his strategy to revive the ailing firm. It is the historic core of the lender, which was founded 149 years ago to help German companies expand abroad, and is the world’s largest clearer of euro transactions, processing $1tn-worth of payments every day.
The 39-year-old Mr Hoops became a protégé of Mr Sewing after joining the bank out of university and has held a variety of positions overseeing trading. He used to sit back-to-back with Gregg Lippmann, the Deutsche trader made famous by Michael Lewis’s book The Big Short — played by Ryan Gosling in the film — for making an outrageously lucrative bet against the US housing market before its collapse a decade ago.
Mr Sewing needs the GTB to succeed if he is to wean Deutsche off volatile and capital-intensive trading activities. The goal is to lift revenue from “stable sources” such as retail and transaction banking to 65 per cent, up from the previous decade’s average of 56 per cent.
Despite a group-level drive to cut headcount, Mr Sewing has earmarked tens of millions of euros to hire new GTB staff. Under Mr Hoops, the GTB already has 2,800 IT employees, including 300 coders who were moved from electronic trading into cash management.
“We want to invest quite a bit. This is not a cost-cutting exercise,” said Mr Hoops, adding that annual costs were scheduled to rise by €200m to €3bn by 2021.
* This article has been amended to correct the name of the actor in the film ‘The Big Short’: it’s Ryan Gosling
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