2018 may go down as the year risk effectively reclaimed Deutsche Bank – in a figurative and fairly literal sense, under new chief executive Christian Sewing, the bank’s former deputy chief risk officer.
Not before time, many would argue: in the decade following the 2008 financial crisis, Deutsche notched up more than $20 billion in fines and regulatory settlements, racked up successive years of steep losses and rattled through five chief executives. The epithet ‘good crisis, bad recovery’ barely captures the horrors the bank confronted during the time. A 2016 International Monetary Fund report labelled the bank the world’s riskiest – unfairly, perhaps – but to many, the label seemed to fit.
Barely two years later, and facing a fresh crisis in the form of Covid-19, Deutsche is a very different-looking bank – leaner, smarter and refocused on its traditional strengths in fixed income and currency trading.
Sewing’s first big strategic move was a vast de-risking exercise, taking an axe to the investment bank, pulling out of equities market-making and hiving off vast portfolios of derivatives into a new bad bank, the lender’s second. As a result, the bank entered 2020 with a conservatively positioned loan book and market risk-weighted assets (RWAs) near historic lows, allowing it to redeploy resources and capitalise on opportunities thrown up by the market turmoil wrought by the pandemic.
The bank has emerged from the Covid crisis with far lower expected credit losses than almost all of its peers. This was partly down to old-fashioned prudent lending, but also because it focused on granular, bottom-up fundamental analysis of its largest credits to set loan-loss provisioning, rather than relying solely on model-dictated numbers.
In non-financial risk – the source of so many of its woes and weighty fines in the 2010s – the bank has made big strides, argues Stuart Lewis, Deutsche’s long-standing CRO and Sewing’s one-time boss – while acknowledging the journey to cultural transformation is still incomplete.
Early on in the Covid crisis, the bank drew a large amount of scrutiny for its decision to switch the economic horizon on its International Financial Reporting Standard 9 (IFRS 9) model out from two years to three – in essence, giving corporates more time to recover from what it hopes, for most, will be a much less worse recession than the cataclysmic falls in macro indicators such as GDP would imply.
In its first-quarter results, Deutsche announced €500 million ($440 million) in set-asides for bad loans – a steep rise, but nothing like the levels seen at some of its peers. Several factors are behind this: basic differences in loan book makeup being the obvious one, with Deutsche having far lower exposure to unsecured consumer credit than any other top-tier lender.
Deutsche nailed its colours to the mast, arguing the move was the right one from a risk, revenue and regulatory…