On the question of whether the bank can still meet its own targets, Hoops says: “If we have to adjust targets because of the corona crisis, we will communicate it accordingly”. Actually, CEO Christian Sewing had promised a black zero in operating profit for 2020 after a billion minus in the previous year.
However, analysts now expect the bank to face a loss of around two billion euros. Hoops sees additional burdens on the industry due to the fact that interest rates are even longer.
Nevertheless, the banker is optimistic that the pandemic will not trigger a banking crisis. “As long as the lockdown does not drag on unpredictably, I do not believe that European banks will face major problems,” emphasizes the 39-year-old.
Read the entire interview here:
Mr. Hoops, how are companies reacting to the corona crisis? Are everyone desperately looking for more liquidity?
The unrest was of course very noticeable for a while. At the beginning of the pandemic, when the scale was still difficult to estimate, many companies pulled their lines of credit as a precaution and tried to secure additional lines. Companies with good ratings also borrowed record amounts of funds on the bond market in the last week of March, partly to show that they can, partly preventively.
What does that mean for Deutsche Bank?
Our credit lines were used less than we would have thought possible in an extreme scenario. We also saw fewer draws in Europe than in the United States.
Deutsche Bank was caught by the corona crisis in the middle of implementing the new strategy. Does this strategy still fit?
It is now becoming apparent that our new strategy fits very well. Two fundamental decisions were particularly important: First, it helps us a lot now that we have concentrated all offers for corporate customers in one area. This business will certainly have the most shifts in market share in the coming quarters from which we want to benefit. It is also good that we have closed stock trading with institutional clients. The market leaders in this area have certainly earned very well in recent weeks thanks to the sharp price fluctuations. But the situation was more difficult for institutions that tend to be in the midfield – and we belonged to this category in institutional equity trading.
If we had to adjust targets because of the corona crisis, we would communicate it accordingly.
Deutsche Bank has set itself ambitious goals, especially for the corporate bank. Are these goals now waste?
If we have to adjust targets because of the corona crisis, we will communicate it accordingly. Regardless of this, we are currently concentrating on processing the flood of loan applications and helping our customers as quickly as possible. That is high on our list. In many cases it is very complex. Especially when you advise companies that are active in different currency areas and countries, since government aid programs are designed differently depending on the country.
What about the credit business?
We are seeing significantly more interest here. Not only for KfW loans, the demand has generally risen worldwide, also on the part of the corporations. In the past, banks gave loans to large corporations practically free of charge to get other, more lucrative businesses, such as payments or foreign exchange. The days of subsidized corporate loans seem to be over.
That would be positive for the banks, but interest rates will generally remain lower for a longer time, which will put pressure on margins. How will these opposing aspects impact overall?
The bottom line is that the negative interest rate effect will overlay the positive aspects. However, banks with more business in the dollar zone are likely to be hit harder than institutes with a focus on Europe. In the euro zone, the industry has long had to deal with how to earn something in a negative interest rate environment. Dollar-heavy banks first have to think into such a scenario. Many businesses that still paid off with a two percent risk-free interest rate will no longer pay off.
Does Corona also change Deutsche Bank’s pricing policy with regard to custody fees for corporate customers’ deposits?
Basically, we stay with our line. We pass the interest on to corporations and large corporate customers, but we do grant allowances. We engage in intensive discussions with our customers and look at the entire relationship – the corona crisis naturally also plays an important role in this. In the end, the amount of the allowances also depends on the scope of the overall customer relationship.
The banks have long struggled to lend to German companies. Now companies that do not have a house bank at their side are skidding. Why isn’t the interest of banks in new customers growing?
In order to obtain loans from the KfW state development bank, companies need a house bank. If a customer is not yet in the system, we first have to subject him to a credit and identity check. This is not a quick process, and even now the banking regulator does not allow us to be careless. In view of the high demand, most employees have their hands full serving the existing customers. Fortunately, we have succeeded very well so far. In such an environment, it is of course difficult to squeeze out resources to get new customers on board.
What about customers who were previously only occasional customers?
After that we do not differentiate. If a customer has gone through the system and through the credit and identity check with us, we are there for them. Ultimately, it’s about a resource issue. We are a house bank for a significant number of companies, but have so far not granted any loans to these customers. Even in such cases, the credit check does not work overnight. It may be that the KfW rapid loan brings relief because it only requires a simplified check.
Was it really necessary for the taxpayer to be 100 percent liable for these loans?
In our view, yes – in the interest of the overall economy. Anything else would slow down the process considerably.
We have around 1.1 million corporate customers in Germany with sales of between EUR 250,000 and EUR 50 million, which are generally eligible for a quick loan. A significant number of these companies have no credit history, and a regular review would take too long. In the case of fast loans, the government has clearly specified which parameters we need to check and which not. This makes it much easier for banks to grant a loan right away. This gives companies valuable time that they urgently need right now.
Is that the only advantage?
This is a big advantage in this situation. Because some customers come from difficult industries in which the turnover has dropped 100 percent overnight, such as hotels or coach companies. This raises the question for all banks of how big the creditworthiness of such customers is at the moment. And there are cases in which – depending on the further course of the corona crisis – the question will arise in the medium term whether companies can survive without additional equity. Normal bank loans, but also the usual KfW loans reach their limits. The KfW rapid loan does not require collateral, which can be helpful in such borderline cases.
Some U.S. banks have already released their first quarter results. Most of them significantly increase loan loss provisions. Will that also happen in Germany?
You have to look at it differently, and there are significant differences. German and European banks, for example, are not so heavily involved in the credit card business – but it is precisely here that American banks are now recording high provisions. There are basically four components that have a major impact on risk provisioning: large individual defaults, many small defaults, or a trend towards poorer credit ratings, which forces banks to put more capital into credit. There are also accounting details because banks also have to provide more equity for loans if interest and principal are deferred.
How big will the overall effect be?
The extensive aid programs of many European countries, especially for smaller companies, will make a significant contribution to ensuring that many companies do not get into serious difficulties in the first place. Short-time work also helps to keep unemployment from skyrocketing like it is in the United States. We are likely to see more failures than before. If only because there have been hardly any failures in the past ten years.
How dangerous is development? Do we have to fear a banking crisis after the corona crisis?
As long as the lockdown doesn’t go on forever, I don’t think European banks are going to have any big problems. European companies will probably be able to deal with this scenario, especially since government measures help to stabilize the situation.
Let us take a look into the future. What could the long-term economic consequences of the corona crisis look like?
In terms of healthcare, Germany seems to be steering through the crisis better than other countries. It is definitely good for people. It was also very important that the German government provided aid very quickly and extensively. That helps all industries. However, we have the disadvantage that the German economy has a strong international focus. When world trade shrinks, it is bad for domestic companies. Some industries will also have to adjust to customer behavior changes.
Which industries do you have in mind?
I believe that people will save more in the future. This will also consume less, with staples still on the shopping list. For example, the middle price segment could have problems. Ordinary earners will consider whether they really need the expensive new TV or would rather wait a bit. Online trade could also gain in importance, at the expense of shopping centers and shops in the city centers.
What about the mobility industry? Will you still go on business trips as often as before?
I will definitely continue to fly to Asia or the USA. With a view to the time difference alone, such trips cannot be completely replaced by video conferencing. But short-distance business trips will be much less common, and people will also be more concerned about vacation trips than before. This has an impact on traffic and tourism. But there will also be relative winners in industries that are shrinking overall.
And how will the corona crisis change your industry?
Certain trends will accelerate significantly, everything that has to do with digitization, online payment processes or the support of e-commerce, for example. In addition, many companies will finance themselves in a completely different way in the future than they do today. We can very well imagine that companies are moving more towards buying machines instead of buying them. This would make it easier to cushion production losses, which would of course be an enormous advantage in the current situation.
What about other megatrends? Are topics like sustainability permanently pushed into the background by the pandemic?
Many in our industry share this concern. At the beginning of this year, I assumed that the topic of sustainability 2020 would occupy me intensively. Now I’m afraid that the whole complex is no longer getting the attention it still deserves. That would be bad collateral damage to the pandemic. However, I firmly believe that this pandemic will also make us think more about the future of our planet. So the topic will climb up on the agenda again.
We almost landed close to the best case scenario.
Corona is slowing globalization. Isn’t that also a clear disadvantage for Deutsche Bank, which not least advertises with its internationality?
If world trade shrinks, banking services based on that trade will suffer, that’s the nature of it. If the cake gets smaller overall, our goal must be to get a bigger piece of it. The feedback from our customers, especially in these weeks, shows me that we are perceived as a reliable and robust partner in the crisis – and that makes me confident.
How do you work as a global bank from your home office? Errors or failures are often even more critical in banking than in other industries.
It works amazingly well. When we intensified preparations for working from home six or seven weeks ago, we developed various scenarios – and we almost ended up close to the best-case scenario. This is mainly due to our IT and operations departments, which do a great job. Around two thirds of the entire workforce of Deutsche Bank currently work from home, and that very efficiently. So we will also think about how we will organize our work in the future.
Perhaps it helps that Deutsche Bank has already weathered one or two of the crises in recent years?
It is certainly true that we have learned to work together particularly effectively in past crises. And we’ve certainly developed a very careful view of what can go wrong over the years. For example, we have always been very careful about IT and processes, but now we have been able to help customers who have had technical problems.
What is the most important lesson from the corona crisis for you as a banker?
That the role of customer advisors has become significantly more important than that of product and process experts. It is about understanding exactly how a company really works, what effects the corona crisis has on the individual areas of a company and what the owners or managers need most at the moment. This is also a nice confirmation for our colleagues who have been at their customers’ side for years. We are currently experiencing tailwind.
And as a father in the home office?
Perhaps we have underestimated the role of the teachers who teach our children every day.
Mr. Hoops, thank you for the interview.
More: Why banks should see the crisis as an opportunity.