Finance Monthly’s CFO of the Year: Interview with James von Moltke, CFO of Deutsche Bank
We introduce you to our CFO of the Year - James von Moltke, Chief Financial Officer of Deutsche Bank.
James von Moltke has been CFO and a member of the Management Board of Deutsche Bank since July 2017. After graduating from New College, Oxford, James worked at Credit Suisse for three years, followed by ten years at JP Morgan in both New York and Hong Kong. James then joined Morgan Stanley, where he led the Financial Technology Advisory Team. Prior to joining Deutsche Bank, James was Treasurer of Citigroup.
James serves on a number of industry bodies. He is a member of the Exchange Councils of Eurex and the Frankfurt Stock Exchange and represents Deutsche Bank on the Executive Board of the Deutsche Aktieninstitut eV (German Equity Institute). James also serves on the Steering Committee on Regulatory Capital of the Institute of International Finance. This year, as the financial industry’s transition away from LIBOR gathers pace, James was appointed Chair of the Euro Risk-Free Rates Working Group of the European Securities and Markets Authority (ESMA).
James, who was born in Heidelberg, serves on the Boards of Directors of the American Chamber of Commerce in Germany, the Atlantik-Brücke eV (Atlantic Bridge), and the Centre for Financial Studies, part of the Goethe University in Frankfurt.
James, why did you join Deutsche Bank?
Throughout my professional career, I have been passionate about helping to lead organisations through times of change. As Treasurer of Citigroup, for example, with responsibility for capital, funding and liquidity, I was able to support a fundamental restructuring of the organisation in the aftermath of the financial crisis of 2008-9. Coming to Deutsche Bank in 2017, I met a dynamic new management team committed to tackling the challenges facing the organisation. This culminated in the radical transformation programme which we launched in July of 2019 and are currently executing.
This also gave me a chance to contribute my international experience at a leading European financial institution, the market leader in my native Germany. Deutsche Bank is Germany’s leading bank with strong European roots and a global network – the only German bank identified as a Global Systemically Important Bank (G-SIB) by the Financial Stability Board. Since its founding in 1870, Deutsche Bank has supported German industry both at home and across the globe. Acting as a trusted adviser and risk manager, Deutsche Bank has built relationships with corporate, institutional and private clients which have flourished over multiple generations. We’re building on this tradition and shaping this bank for the future – and that’s an exciting mission to be part of.
What is the background for Deutsche Bank’s transformation strategy?
In launching our transformation strategy, we set out to resolve several key challenges. We needed to improve profitability, reduce costs, instil greater discipline in capital allocation, reduce leverage, and at the same time sharpen our focus on building sustainable relationships with our most important clients. Our response to these challenges was the most fundamental restructuring of Deutsche Bank in the past two decades. We set ourselves an ambitious timeframe for execution: we aim to complete this transformation in three and a half years from our launch in mid-2019, so by the end of 2022.
And what are the objectives of the transformation?
We focused our transformation strategy on four fundamental goals:
- To refocus Deutsche Bank around four client-centric core businesses, by exiting businesses making inadequate returns and sharpening our focus on key clients. These four businesses form a clearly-delineated ‘Core Bank’;
- To restructure in order to become more efficient, particularly in our infrastructure – reducing operating costs by around €6 billion from 2018 levels while continuing to invest in technology, controls and growth opportunities;
- To reinvigorate the bank’s traditional entrepreneurial spirit under the leadership of a new management team, with faster decision-making, disciplined execution and cultural change;
- To free up capital by winding down assets committed to non-core activities, thereby helping Deutsche Bank self-fund transformation. This paves the way for us to return € 5 billion of capital to shareholders from 2022 onwards. To achieve this, we set up a dedicated Capital Release Unit, separate from the Core Bank, with clear targets for asset reduction.
We also set ourselves clear financial targets for 2022. These included a post-tax Return on Tangible Equity of 8%, and above 9% in our Core Bank; a cost/income ratio of 70% and maintaining a Common Equity Tier 1 (‘CET1’) capital ratio of at least 12.5% throughout the transformation process.
What are your priorities in Deutsche Bank’s core businesses?
We set ourselves clear objectives for each of the Core Bank’s four businesses:
- We placed a new Corporate Bank at the heart of our business. We’re building on deep roots in our German home market to become the bank of choice for corporate treasurers in our key markets. We switched from a product-led to a client-led coverage model, and we’re growing our online digital offering;
- We focused our Investment Bank around core strengths – businesses where we have leading positions, including financing, fixed income and debt capital markets. That includes exiting from Equities trading, resizing our core Rates platform and winding down non-strategic assets;
- Our Private Bank is the clear leader in Europe’s largest economy. We’re focused on expanding our global wealth management and digital banking capabilities while reaping the synergy benefits from our merger with Deutsche Postbank. We aim to counter the impact of low-interest rates by growing loans and assets under management;
- In Asset Management, our objective is to build DWS, our Asset Management subsidiary floated in 2018, into a global top-10 asset manager. We aim to achieve this by leveraging our commanding market share in Germany, seizing opportunities to grow in Asia and leveraging strategic partnerships to expand our distribution and product expertise.
In the middle of a global pandemic, that’s an ambitious agenda. What progress have you made so far?
The pandemic forced us to transfer around 70% of Deutsche Bank’s staff – more than 60,000 people – to working from home in a matter of days. Despite that, we’re on track with our strategic and financial objectives:
- We have significantly improved profitability. In the first half of 2021, we generated the best first half-year profits since 2015, with all four core businesses contributing to year-on-year profit growth. Both our cost/income ratio and Return on Tangible Equity are well on track towards our 2022 targets.
- We have reduced operating costs significantly. We have achieved fourteen consecutive quarters of year-on-year reductions in our underlying cost base. Adjusted for transformation-related effects, costs are running at around €1 billion per quarter lower than in early 2018.
- We have cut more than € 200 billion of balance sheet related to non-core activities. Our Capital Release Unit has cut leverage exposure by around 75%, or € 217 billion. Risk-weighted assets have been reduced by more than half to € 32 billion, thereby already meeting our year-end 2022 target.
- We have kept our capital strong. During the eight quarters of the transformation programme so far, our Common Equity Tier 1 ratio has remained comfortably above our threshold of at least 12.5%, despite the twin challenges of transformation-related costs and risk-weighted asset inflation driven by regulatory changes. Our CET1 ratio currently stands at 13.2%.
- Our sharpened focus on clients is paying off. Our Investment Bank has made market share gains in key areas of strength. Our Corporate Bank has successfully launched initiatives to expand our offering in growing business areas like payments. Our Private Bank has offset deposit margin compression with growth in both new client loans and inflows into investment products. Over the past twelve months, our Asset Management business has attracted € 45 billion in net new money from clients and assets under management have grown by € 114 billion to a record high of € 859 billion.
How important is sustainable finance for Deutsche Bank’s future setup?
Deutsche Bank is absolutely committed to sustainable finance, both within our own operations and in helping our clients on the path to meeting the Paris Agreement on Climate Change. We have set clear targets for financing and investment in environmental, social and governance (ESG) activities, both at the Group level and for each core business. In the eighteen months up to June 2021, our cumulative volumes of ESG financing and investment reached nearly € 100 billion – halfway to our goal of at least € 200 billion by the end of 2023. Deutsche Bank serves on the Sustainable Finance Committee of the German Government and is a founding member of the Net Zero Banking Alliance and other industry bodies. Our commitment to a more sustainable Deutsche Bank is also supported by our key stakeholders: Moody’s Investor Services, the leading rating agency which recently upgraded Deutsche Bank’s credit ratings, made clear that “DB’s sharpened focus on sustainability and attention to fast-evolving environmental, social and governance standards are credit positive.”
Deutsche Bank is absolutely committed to sustainable finance, both within our own operations and in helping our clients on the path to meeting the Paris Agreement on Climate Change.
What role has the Finance function played in Deutsche Bank’s transformation?
Finance has played and continues to play, a vital role in planning, designing, enabling and funding Deutsche Bank’s historic transformation. In several ways, we have redesigned Finance’s processes, our ways of working and our culture in order to help the bank reach its goals. Some of Finance’s key contributions were:
- Re-focusing Deutsche Bank around core businesses. Finance led the analysis which identified businesses or activities not generating adequate returns and led the due diligence on business exits – for example, transferring Global Prime Finance to another leading European bank, which offers continuity for clients and core employees. We were instrumental in setting up the Capital Release Unit and re-engineered our reporting around the bank’s new segmental structure.
- Instilling a culture of accountability and delivery. Finance spearheaded the introduction of Balanced Scorecards, initially for Management Board members and progressively further rolled out across around 300 of the bank’s senior leaders. This established a transparent, verifiable link between objectives, actual performance, and senior executive compensation. We re-engineered the planning and quarterly review process to reinforce management discipline and identify potential issues at an early stage. This owed much to the efforts of Rebecca Short, then Head of Planning and Performance Management, who has now been elected to the Management Board as Chief Transformation Officer.
- Transforming Deutsche Bank’s cost culture. Finance launched a multi-year Cost Catalyst programme, harnessing employee ideas and contributing hundreds of millions of euros in annualised cost savings. We set up and co-led an External Spend Council to manage around € 9 billion of annual spending with external vendors, driving better deals with external providers and reducing fragmentation in our vendor base. We rolled out Driver-Based Cost Management, which gives managers in our businesses more transparency on drivers of their infrastructure costs. That enables them to make better-informed spending decisions.
- Helping managers make better, faster decisions: from monthly to daily close. Finance is radically accelerating our close process from monthly to daily. We’re re-engineering six general ledgers into a single, state-of-the-art general ledger platform that is compatible with Cloud and other technology environments. We’ll make a step-change in straight-through processing, and produce faster, more accurate information at a lower cost with better data quality. Given the upheavals caused by COVID-19, it’s been crucial for our leaders to make fast and accurate decisions based on high-quality, up-to-date information.
- Funding transformation and supporting balance sheet strength. Growing recognition for Deutsche Bank’s progress and supportive capital market conditions enabled our Treasury team, led by Group Treasurer Dixit Joshi, to get ahead of our capital market funding plan. In 2021 to date, we have completed nine successful issues of senior debt or Additional Tier 1 (AT1) and Tier 2 capital. This strengthened Deutsche Bank’s capital and funding base by € 11 billion at favourable prices. We have also supported the bank’s sustainability agenda, issuing two green bonds to support clients’ sustainable activities. This year, we issued a Diversity and Inclusion Bond in partnership with co-underwriters led by minority groups and service-disabled veterans. In commenting on its recent upgrade of Deutsche Bank’s credit ratings, Moody’s made clear that strong capital and liquidity were positive factors.
- Installing rigorous ESG performance management. Companies across the world are striving to reinforce their sustainability credentials, so disciplined performance management is all-important. There can be no place for ‘greenwashing’, or indeed ‘greenwishing’ – that is, setting grandiose targets with no clear monitoring of delivery against them. Under the leadership of Gerald Podobnik, CFO of the Corporate Bank and Co-Chair of the bank’s Sustainability Council, Finance has installed performance management systems to monitor delivery on targets which are near-term, granular, based on a clear ESG taxonomy, verified independently of the businesses, and directly linked to senior executive compensation. Our aim is simple: to ensure that the transition to a more sustainable Deutsche Bank is verifiable, transparent, and rigorously managed.
- Working in more agile ways. We’re adopting agile methodologies in many areas across Finance. That means working more closely in teams with our partners in Technology, being less monolithic but more frequent in our systems releases, and giving our people the opportunity to drive change and take responsibility for it. In a matter of months, we doubled the proportion of our Change budget which is delivered through agile methodologies.