Stability and sustainability moving forward

23 Mar Stability and sustainability moving forward

Karl von Rohr, President, Deutsche Bank, discusses how crises of the past make for a more shock-proof bank moving into the future.

As a leading global bank, what insider’s view can you give us about Frankfurt and Hessen’s overall economic strength? What are some of the factors you believe contributed to the region developing such a competitive financial services industry?

While it may not be its political capital, Frankfurt is undoubtedly Hessen’s—and in fact Germany’s—economic heart. The state itself is an economic force to be reckoned with. It’s gross domestic product (GDP) is higher than that of most EU member states, and Frankfurt is the biggest contributor to this impressive achievement. After the Second World War, when Berlin lost its prevailing position, Frankfurt was able to reconnect to its centuries-long tradition as a leading financial center. Deutsche Bank had been present in Frankfurt since 1886, when it became the first major bank to open a branch there. After 1945, with more and more functions moving to Frankfurt, the city became Deutsche Bank’s headquarters. The Bundesbank and KfW, the country’s promotional bank distributing funds from the Marshall Plan, established themselves in Frankfurt, and, along with other banks, played their part to help the city’s ascent. Much later, shortly before the new millennium started, the European Central Bank opened its doors here. Only 10 years later we jointly and successfully battled the financial crisis, cementing the importance of the financial services sector in Germany, Europe and the world.

What key, underlying factors and economic forces have contributed to Deutsche Bank’s success over the last decade?

Deutsche Bank’s results in the past decade have been impacted by the fallout from those aspects of the financial crisis that still needed to be resolved. When you put that aside, the most important factor in Deutsche Bank’s success has always been our ability to center our business around our clients. The ambition to give our clients the best service while aiming to reward our shareholders, and be an attractive place to work, has been our guiding light over recent years. This was also a key driver for the strategic objectives we set out in mid-2019, when we changed our structure and exited businesses we felt we could not compete in. As a result, Deutsche Bank is now more resilient, with robust risk management, a strong balance sheet, materially improved controls, and sustainable profitability. In 2021 we achieved our highest net profit in a decade and put the costs of our transformation almost completely behind us. We are now a different bank.

What are some of the new areas which the bank is seeking to leverage in its latest strategic plan?

A few weeks ago, we presented the market with our plan from now to 2025, which is an evolution of our earlier strategy. We did so against the backdrop of the terrible war in Ukraine, an aggression we condemn in the strongest possible terms. This war brings new uncertainties both geopolitically and economically. We see these uncertainties affecting our clients’ businesses and households and also reflected in financial markets. These are difficult times, but they are also the times we have to demonstrate stability and leadership and be there for our clients.

After all, despite the current uncertainties and possible economic repercussions, we believe that the long-term fundamentals of Germany and our leading position in our home market are a clear advantage. Germany has great strengths: the world’s fourth-highest GDP and an excellent position in markets across the globe. It is also Europe’s most stable major economy, with comparatively low levels of debt and credit default rates. And above all, Germany has many world-leading companies that displayed great resilience in times of global uncertainties. Such an economy needs a bank that is just as global and as strong as its corporates. A domestic bank with a global mindset and franchise that can support corporate Germany globally—but also act as an intermediary for foreign companies and investors that are attracted by our country’s economic strength.

Our clients want an alternative to US banks, not only in Germany and Europe, but also in the Americas and Asia. We intend to build on this strong position by leveraging three key drivers we believe will shape the coming decade in order to grow with our clients: firstly, changes in the macroeconomic environment will materially impact corporates, investors and also public finances; secondly, the climate crisis is forcing all of us to transform to a sustainable economy—which demands huge investment and financing needs; finally, rapid technological progress in all areas presents opportunities but also poses big challenges to our clients. We need to navigate them through this.

We have the necessary advisory capacity and product expertise to find responses to these major trends for our clients. That should help us to gain market share and grow faster than the overall industry.

In financial terms, we aspire to become a $33 billion revenue bank by 2025 through annual revenue growth of 3.5 to 4.5 percent. We are aiming for a competitive cost to income ratio of less than 62.5 percent in 2025. This would result in a return on tangible equity of greater than 10 percent by that year, exceeding our cost of capital. And lastly, we aim to distribute $8.8 billion to our shareholders for the years 2021 to 2025, subject to achieving our plans.

Broadly speaking, what has been the net impact of the pandemic on Frankfurt’s financial services industry? What are some of the most effective strategies and programs launched by Deutsche Bank to counter the economic and societal downturn from 2020?

The COVID-19 pandemic had a significant impact on policymaking and the economy, as well as on our clients and employees. The financial services industry in Frankfurt—and more broadly in Germany—was only affected to a limited extend. Deutsche Bank served as a reliable partner to corporate, institutional and private clients. For example, our corporate bank collaborated closely with state KfW banks and at the federal level to support our corporate clients during the pandemic. In 2021, the demand for state-backed support programs declined, because a large percentage of our corporate clients are in generally sound financial condition, another strong signal of the soundness of Germany’s overall economic health. Our private bank provided its clients with risk and credit management as well as investment advice in sometimes existential situations. We also accelerated the expansion of our digital and mobile offers to meet clients’ changing demands during the pandemic.

To protect our employees’ health, but also to allow them to continue to support our clients and the economy, we implemented a broad set of measures to tackle COVID-19. These included ongoing hygiene measures, self-testing and vaccinations at many locations. In Germany alone, the bank provided more than 14,500 vaccinations to employees, their relatives and contractors. We also enabled employees to work from home whenever possible. On any given day in 2021, up to 73,000 Deutsche Bank employees worldwide were working remotely.

We continued to take our societal responsibility seriously throughout the pandemic, starting in 2020 with a bank-wide CSR COVID-19 community relief campaign to support long-standing partner charities at a time when vulnerable members of our communities needed them most. The bank and over 7,000 employees donated $2.7 million for 40 charity partners in 35 countries. In 2021, we addressed the impact that disruptions to education and training had on young people’s education and social development. Our #NotAlone campaign partnered with 41 youth mental health charities in over 30 countries and provided more than $1.1 million for strategic projects. Our support enabled these charities reaching more than 123,000 children and young people.

What is Deutsche Bank’s approach to sustainability and what are some of the green opportunities the bank is currently evaluating and investing in?

Sustainability is at the core of Deutsche Bank’s strategy, for our own operations, and, most importantly, to support our clients’ transformation to more sustainable business practices. With the German government being among the most ambitious in accelerating the transition and German corporations having the technologies that will enable the green transformation, we stand ready to finance it.

Deutsche Bank already has a comprehensive ESG product and service offering which positions us for further growth. And we are now focusing on a holistic and continuous dialogue with our corporate and with our private clients to support their transition. Just one example, in 2021 we concluded a $16.5 million bilateral, sustainability-linked loan for Barbor Beauty Group, the German cosmetics company, to fund the expansion of a production facility, while committing to reduce carbon emissions by 50 percent in five years. If Barbor meets this target, it will benefit from a lower interest margin; if not, it committed to donate to an NGO that finances carbon offset projects.

For our private clients we launched “green branches” which offer dedicated ESG advice and services. Moss walls, LCD screens and other design features make ESG a tangible experience and these branches are a great springboard to conversations around sustainability—something more and more clients care deeply about.

Regarding global finance and banking, what are the biggest impacts of the war in Ukraine? Do you see new standards in transparency or technology emerging as a result?

As we have repeatedly said, we condemn the Russian invasion of Ukraine in the strongest possible terms and support the German government and its allies in defending our democracy and freedom.

Deutsche Bank has substantially reduced its Russian exposure since 2014. Like some international peers, and in line with our legal and regulatory obligations, we are in the process of winding down our remaining business in Russia while we help our non-Russian multinational clients in reducing their operations. There won’t be any new business in Russia.

It’s important to resolve the situation and first and foremost help the millions of victims that are suffering from this terrible war. While it most certainly may have effects on transparency or technology in the long run, the geopolitical implications are massive, i.e. with respect to European and German energy policy, to Europe’s security architecture, and a potential new block building of the West versus Russia and China. It seems premature to speculate about the mid- to long-terms implications in detail. What is clear is that the world has become more complex, with rising uncertainties that will have a lasting impact on society, the economy and banking.