Deutsche Bank Sees Hurdles to Consolidation: Future of Finance

The coronavirus crisis, Brexit, climate change and the end of the Donald Trump-era will disrupt markets and challenge investors and policy makers heading into 2021.

To help sort through the issues, Bloomberg is hosting the Future of Finance conference, a virtual event with leading figures from banking, insurance, regulatory agencies and central banks.

On Tuesday, Robert Kaplan, head of the Federal Reserve in Dallas, told the event that the resurgence of Covid-19 jeopardizes the next two quarters for the U.S. economy, which is poised to bounce back.

On Thursday, speakers include Felix Hufeld, head of Germany’s financial regulator BaFin, Austrian Finance Minister Gernot Bluemel and Erste Group CEO Bernd Spalt.

Key Developments on Wednesday:

  • Deutsche Bank’s Americas chief Christiana Riley said a wave of trading has been unleashed in recent days by vaccine news and clarity in the U.S. election
  • Allianz CEO Oliver Baete said the risks are increasing for a “massive shock” to the global economy as businesses and consumers become less willing to invest in the future
  • Swiss Re CEO Christian Mumenthaler estimated that the coronavirus crisis has cost the global economy $12 trillion
  • Mumenthaler worries the next big global catastrophe could come from a cyber meltdown and said the number of global risks are increasing
  • Credit Suisse CEO Thomas Gottstein said that managing through the pandemic has become “a bit more predictable but still tense”
  • “Consolidation is needed and will happen” in the European banking sector, Gottstein said, adding that mergers will be more domestic than cross-border

Here’s the latest from the event, updated throughout the day (timestamps are local time in Frankfurt):

Consolidation Faces Regulatory Hurdles (3:30 p.m. CET)

Deutsche Bank Sees Hurdles to Consolidation: Future of Finance

Bankers have been asking themselves whether European lenders will merge for a decade, Deutsche Bank’s Riley said.

While it’s clear that the industry is ripe for consolidation, valid regulatory and political considerations have stood in the way, she said. National, not international, deals are more likely as supervisors consider more “structural protections,” she said, echoing comments earlier from Credit Suisse’s Gottstein.

As for American predators? U.S. banks probably aren’t interested in wading into those political headaches, given the lack of return in Europe’s much worse interest-rate environment.

Competitive Compensation (3:25 p.m. CET)

Deutsche Bank’s investment bank has performed well across several business lines, and the lender will reward staff for that performance “in a way that is consistent with competitive market practices,” said Riley, head of the German company’s Americas operations.

The comments support to remarks by Deutsche Bank Chief Financial Officer James von Moltke in a previous Bloomberg interview in which he indicated that top performers can expect higher bonuses. Riley also highlighted “differentiation” in bonuses to indicate the close link between bonus payments and performance.

Offices Still Matter (3:20 p.m. CET)

Deutsche Bank’s Riley said “the future of work involves office presence” and pointed out she herself had joined the event from the lender’s Wall Street office.

Deutsche Bank will move to a new New York office next year and has said most staff should continue to work from home until that date.

Vaccine Could Be Inflection Point (3:15 p.m. CET)

Christiana Riley, Deutsche Bank’s head of Americas, said recent progress on developing a Covid-19 vaccine along with clarity in the presidential election has unleashed a wave of trading.

“The past couple of days since Pfizer’s groundbreaking announcement and what we all hope will be an inflection point in this pandemic, the street has seen quite tremendous volumes as a consequence of that,” she said. “All of us who have been in this industry long enough know that a couple of days do not make a quarter. But there was always going to be a a degree of election bounceback certainly here in U.S. markets.”

Deutsche Bank’s U.S. business has stabilized as the company reaffirmed its commitment to its operations in the country. “The U.S. is here to stay. We’re giving a reason for people to hook their careers to this organization,” she said.

Standing by Strategy (3:05 p.m. CET)

Deutsche Bank’s Riley said the German lender will stick to its strategy, despite ongoing uncertainties over the pandemic and the political environment.

In the U.S., while it’s too early to know for sure, she expects Joe Biden’s administration to take a more centrist approach to banking policy. “I have a degree of certainty that we’ll be modulating back to the middle,” Riley said.

Pimco in Good Shape (2:25 p.m. CET)

Deutsche Bank Sees Hurdles to Consolidation: Future of Finance

Allianz’s Baete said Pacific Investment Management Co. is well-positioned to take advantage of current volatility.

“It’s the world best fixed-income manager and is also managing the vast majority of our assets for our policy holders. So we are getting a double benefit,” Baete said. “I am feeling very, very safe.”

Allianz is counting on its giant asset-management unit as a source of stability and diversification during the pandemic. Pimco saw third-party clients add 27 billion euros ($32 billion) in the third quarter. Though at the onset of the pandemic, the unit recorded its worst outflows in five years with investors pulling 43 billion euros in the first quarter. He declined to comment on future flows.

Vaccine Reaction Overdone (2:15 p.m. CET)

Baete said investors have gotten carried away in their exuberance over the prospects of a Covid-19 vaccine to stem the pandemic.

While a vaccine will make a “huge difference, the market has “overreacted a bit,” he said. “We have to be a bit cautious because we need to produce the vaccine at scale. We need to build the infrastructure to deliver it.”

He reaffirmed that Allianz should face lower claims for business interruption next year. Allianz recorded 1.3 billion euros of virus-related losses in the first nine months of the year, with the majority coming from its non-life insurance business.

‘Massive’ Shock Is Increasingly Likely (2:05 p.m. CET)

Allianz’s CEO said with the new round of lockdowns, the economy is facing a “once bitten, twice shy” scenario, where consumers and businesses are reluctant to invest in the future. That makes the world more volatile, making a stark warning.

“We need to be aware that a massive shock may occur and it’s more likely than not,” he said.

Sovereign-Debt Risk (10:30 a.m. CET)

Deutsche Bank Sees Hurdles to Consolidation: Future of Finance

Another risk is the surge in borrowing as government’s seek to prop up pandemic-hit economies, even with many balance sheets already stretched.

“It’s almost a certainty that there are going to be issues” with the massive amount of sovereign debt that has been issued during the crisis, Swiss Re’s Mumenthaler said. “How we are going to deal with this enormous amount of debt is not talked about.”

He also said he was more worried than some about the risks of U.S.-China tensions, though there’s not much reinsurers or their executives can do about it.

Cyber Meltdown Could Be Covid-Like Crisis (10:25 a.m. CET)

Mumenthaler looked at threats beyond the current crisis, pointing to cyber risks as something that could be equivalent to the pandemic. He called a widespread outage from a virus or the breakdown of cloud as “borderline” insurable.

“You can take some, but it will never be enough for the economic damage,” he said. “It would be worthwhile in advance to think about solution for the states.”

Risks that affect whole world at same time have increased, he said, adding that the insurance industry can’t handle it on its own.

ESG Investing Returns (10:20 a.m. CET)

The CEO delved further into what it really involves to make ESG-based investments as a big company, pointing out that Swiss Re was an early adopter of the movement. Two to three years ago, the firm switched to ESG benchmarks, mostly for bonds.

“We only invest in the 50% best players in every industry, based on ESG rating,” he said. The ESG strategy isn’t to get high returns, but because “it’s the right thing to do.” But so far, ESG assets have outperformed the rest, he said.

Public-Private Risk Sharing (10:15 a.m. CET)

Mumenthaler said reinsurers are exploring how they can partner with governments to help society cope with pandemics. He drew a comparison to Pool Re, the U.K. government-backed reinsurer that covers terrorism.

“The premium could go to the state, but goes through the insurance process, has an automatic payout through the insurance mechanism,” he said.

The industry could construct something but needs the political will, he said, adding that the risk the insurance industry can take on is “de minimus.”

Increasing Climate-Change Risk (10:10 a.m. CET)

Swiss Re’s Mumenthaler gets right into the issue of climate change and catastrophes and how insurers and reinsurers are adjusting their models accordingly.

“Fire has increased due to climate change -- an impact can be measured,” he said.

Conversely, there’s no evidence that climate change causes hurricanes, but damage bills are more expensive from those storms as people build expensive property in vulnerable areas.

Covid’s Not a Black Swan, But Costly (10:05 a.m. CET)

Swiss Re’s Mumenthaler kicks off by saying the coronavirus pandemic wasn’t a black swan event. He put the estimate of output lost as a result of Covid-19 at $12 trillion.

“Every 30 or 40 years we have these types of pandemics, and unfortunately since it is viral, we still don’t have the effective way to combat them,” he said.

The surprise wasn’t so much that there was a pandemic, but rather the reaction of societies and the stringent lockdowns.

“Pandemic is a risk that cannot be diversified and cannot be insured,” Mumenthaler said. “The insurance industry knows this.”

Market-Based Recovery (9:45 a.m. CET)

Deutsche Bank Sees Hurdles to Consolidation: Future of Finance

On the post-pandemic economic recovery, Gottstein called on the governments to step aside and let the financial system do its work and be part of the solution.

“Certain areas like airlines and airports will need government support,” he said. “The rest should let the markets do it, it should be done by the banks.”

Asia’s Growth Mode (9:40 a.m. CET)

Gottstein pointed out that post-Covid Asia is in growth mode, compared to the defensive outlook in Europe.

“China is absolutely key for our global plans,” he said. The bank is seeking securities licenses, hiring relationship managers and hoping to get investment-banking business from its private-wealth clients -- often entrepreneurs who want to tap the public markets.

“There is a lot of investment needed over the next three to four years,” but the bank’s strong brand in China helps. The challenge in private banking is “to find the talent. There is a big competition for talent.”

The bank has a 51% stake in its local securities venture, but hopes to take it to 100%, and is “very active” in equity and debt sales for Chinese companies.

Covid Spurs Digital Shift (9:30 a.m. CET)

Fallout from the pandemic has pushed Credit Suisse’s clients to be more digital and demand more private-market products in their search for yield, Gottstein said. Clients are also seeking more ESG products, especially in Europe.

“We have an opportunity, once we are out of the Covid-19 crisis, as a lot of private banking clients want to have full blown solutions around ESG,” he said. “European private banking clients feel underserved in private markets and ESG.”

Consolidation Needs to Happen (9:25 a.m. CET)

Gottstein spoke on the future of the European banking sector. “Consolidation is needed and will happen,” he said, adding that mergers will be more domestic than cross-border.

He said the bank has a good platform to grow organically but will always remain open to looking at opportunities especially in private banking.

Gottstein said negative rates will continue to pressure banks in Europe to consolidate as net interest makes up 50% to 60% of revenues.

Managing Covid Is Still Tense (9:15 a.m. CET)

Thomas Gottstein, who became Credit Suisse’s CEO in February, spoke of a difficult year to start on the job. He said he was surprised to see how well home-office programs ended up working.

One of the most difficult moments was the beginning of the second quarter when the bank was still guessing how much to provision for potential credit losses and there was a lot of demand for liquidity from its clients.

Several months into the pandemic, managing the crisis is “a bit more predictable but still tense.”

©2020 Bloomberg L.P.

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