Deutsche Bank has sold its credit card portfolio but will not exit the retail banking space, said Gunit Chadha, CEO of Deutsche Bank group in India. Instead, the German bank will focus on retail liabilities to collect cheap money.According to Chadha, scale by itself is not important for Deutsche Bank unless it is combined with profitability. Edited excerpts:
With Anshu Jain being as Co–CEO designate at Deutsche Bank AG, will things change in India?
The entire board of Deutsche Bank has been very committed to India for the last several years. Certainly, it has always helped because Anshu understands the Indian eco system and is very closely related with the Indian clients. His partner, Jurgen Fitschen, who takes over as the Co-CEO with him, and who has been for many years the chairman of the Indo-German consultative group, is no stranger to India as well. Having both at the top is very good for the bank.
What kind of impact of the Euro zone debt crisis and US downgrade do you see on India?
Fortunately, India’s total export to GDP is less than 20%. Relative to many of the other emerging markets, India is still less exposed from the trade standpoint. It is, however, exposed from a capital flow standpoint. But do we expect that 2011 is very similar to 2008? Absolutely not.
Policy outlook: Chadha says the group sees the interest rate cycle at being near its peak. Photo Hemant Mishra/Mint
What’s your estimate for the Sensex by the year end?
By December 2011, we see the Sensex at 21,000 and we think that in 2012, we will probably see a continued growth of corporate India.
Is this estimate post the recent crises?
No, it’s old but we haven’t changed our estimate.
There is no liquidity crisis which was the case in 2008. Also I think a big difference is that, today while the macros are strained, corporates are sitting on a lot of cash globally.
In India, the corporates are sitting on a lot more cash now and the access to credit markets is completely open. In fact, there is more debt raising happening in 2011 than anytime in 2008. The FDI (foreign direct investment) in 2011 trend is very strong and in the first half of this year, FDIs are up 57% year-on-year at $17 billion.
The challenge is when will capital formation happen? Do we see a slowdown in corporate appetite for credit?
The corporate appetite for credit is growing on the working capital side, and that’s expected as the raw material prices have been going up and there is commodity inflation and wage inflation.
What about new investments?
I am not seeing new investments happening at the same pace. It has partly to do with some of the policy inaction which was there for the previous 12 months, partly a loss of confidence, but we see that now confidence is coming back. I think over the coming six to nine months, you will see capital formation starting. It’s weak today.
Is it because of high interest rates?
Yes, partly because of high interest rates as you don’t want to add capex when rates are high. Deutsche Bank’s view is that we are probably at or near the peak of interest rate cycle. We think the Reserve Bank of India (RBI) may raise interest rates by another 25 basis points and this would be in the next credit policy. But given what’s happening globally, if commodity prices start to come off, oil price stays where it is, and if some of the growth indicators start to taper off, may be that won’t happen.
We do believe that over the next six months, you may see an interest rate down cycle emerge and if that coincides with new capex formation starting to happen, that would be a perfect start. Which is why our research analysts are bullish on India from a fundamental perspective, holding on to the 21,000 Sensex estimate level. This may look a bit optimistic in next five months, but over 2012, I would agree with that.
Deutsche Bank in India is very strong in certain areas such as corporate and investment banking, foreign exchange, fixed income, custodial services but it doesn’t have the scale and continues to be a niche bank.
We like to pick niches or a series of niches where we can dominate the market. Once you start having market leadership in some product areas, you add a lot more value to customers. In the custody business, we have now over $150 billion of assets. The same is true for our foreign exchange business, which is becoming very important because when customers borrow in dollars for five years, 10 years or raise perpetual bonds, they need to hedge the currency risks. Today clients need to hedge the commodity risks as well. So, that business is something that plays to a global strength.
Most people get surprised when I tell them that Deutsche Bank in a very low noise way has book run five of the six largest IPOs (initial public offers) in the Indian history, including Coal India and Essar Energy recently.
But you didn’t make money from the big IPOs…
Yes, there were no fees from Coal India but that was by choice. We all bid on that basis. But I also believe that it’s a part of a larger whole because we also serve global investors who want to buy into Indian stocks.
When it comes to global business you are closer to the hedge funds than the long-only funds. Here the churning is too much and you make a lot of money. But isn’t association with long-only funds is more stable?
I think that’s a little bit of unfair criticism. Deutsche Bank has been globally serving the hedge funds community in a very mature way. It’s a very large multi trillion dollar market.
That market has shrunk now.
Actually that market hasn’t shrunk to the point where most people thought it would shrink to. It has come right back. But an increasing proportion of the market that our equity broking side handles is long-only investors. We are spending a lot of our energy right now in building a very large equity franchise through our equity capital markets and our equity broking businesses.
In some of the business segments like institutional broking, you are under-staffed if you compare it with competition.
It’s a Deutsche bank DNA that we challenge people to the extreme. We like to select very high quality people, empower them and challenge them to deliver the best. Putting on another pair of hands could be a very simple decision for some one else but for us it’s not the most intuitive thing to do. We like people to challenge themselves much more.
You are probably right in that criticism. But it’s by choice and, if we need to bulk up our resources in sales or trading and equity broking, we can do that to get to the number one position.
Deutsche Bank is in India for 30 years now. In ‘90s it tried to get into retail banking but failed. Again, in 2005, it got into it, but you seemed to be nowhere. You sold off your credit card business …
We got into the credit card business and we found it was not core to our retail franchise. I frankly could not put a pulse into that business. Do you scale up to glory or do you shrink up to glory? You can’t answer that fundamental question, given that our opportunity to scale up in India is limited by regulation. So we thought the best thing to do is to focus our retail business on building the deposit franchise. Our CASA (current and savings accounts) in India is over 65% and this is why our NIM (net interest margin) is 5.9% and our return on assets is 2%.
Now, how has this happened? Frankly, we have taken very hard decisions to focus where we truly believe we can add value to our customers. Our retail franchise is around building our deposit franchise, providing investment advisory for retail customers to invest their money and providing a mortgage product. It’s constrained by the 15 branches but we hope that will change over time.
You also run wealth management business.
Of course, that’s a very key part of our retail and our private banking franchise.
You have Rs 11,000 crore assets under management in your mutual fund and you are selling that business...
Absolutely untrue. Let me just say, it’s one of the highest RoE (return on equity) businesses we have in India. It is about Rs11,000 crore and our investment advisory or wealth management businesses is another Rs 10,000 crore. These are classified as fiduciary businesses and we are very effectively managing third-party money. We are completely committed to our asset management business.
You did say that about your credit card business too.
No, the bank did not make any affirmative statements on credit cards. But I am making an affirmative statement (about the asset management business). We try to build profitability as a key mantra for all our businesses and you got to do that for your shareholders.
So, the scale is not that important for you.
It’s important if it sustains and enhances profitability. But at the end of it, if it’s at the expense of profitability, I don’t think scale in itself is an objective.
Most foreign banks that operate in India are quite open about where does their India business stand on the global scale – what’s their contribution in terms of assets and profitability – but Deutsche Bank never says that.
Deutsche never discloses its country P&L to the Street and as a result of this we don’t say that. But India is one of our fastest growing markets globally. Our India revenues have grown 25% year-on-year for the last five years through the crises. Our profits have grown 38% in the same period. And our net NPAs (non-performing assets) is just 0.2%. It is a high growth, high quality market and among the largest in Asia-pacific.
In the Asia-pacific market, your contribution continues to be about 15-16% for the last five years. In relative term, you have not grown.
I am not going to agree or deny that. All I will say is that hopefully, its just different set of numbers that are there.
In 2011, the parent pumped in Rs330 crore and there has been continuous capital infusion. Not too many foreign banks have Rs5,500 crore capital.
Leave alone foreign banks, we are one of the very large FDI investors in India and that’s a function of frankly where India Inc. is today.
What will you do with so much capital?
We have Rs33,000 crore of risk weighted assets here and it’s not a small amount. Our capital adequacy ratio is 15% and we don’t want to go too much below that. So, we do use our capital well with a little bit of buffer. A lot of our businesses like the custodian business, the equity broking business, the investment banking business and private wealth management business don’t consume capital. It’s a great opportunity for us to invest capital when we need to finance corporate India or we build businesses around that, which don’t necessarily have to dip into that capital pool.
I think India has a great opportunity for any global multinational and I must compliment the Deutsche Bank board for investing in this market over a decade.
Even before you were there...
Absolutely, and I think what my team has done is that being very stable over the last so many years in delivering that opportunity. It’s a benefit of a very stable team.
You said you will grow retail to the extent the regulatory norms allow you. You have 15 branches in 14 cities. The regulator will never say no if you want to get into an unbanked area. Have you ever tried that?
No. We have been getting two to three branches every year. Will that dramatically change? I think it will only change once the subsidarization norms come. We would love to open branches in places like Hyderabad and Ahmedabad where a lot of global customers are investing. Indian companies are also investing at these places and certainly we would be very happy to build inclusively along with them.
What’s the ideal number of branches for your bank – between 50 and 100?
You are right, somewhere in that range.
How many licences do you actually seek every year?
Well, like many things in life, you seek many more. You are far greedier in terms of what you ask but what you get is 2 to 3.
Both the government as well as RBI are driving financial inclusion and if you want to open branches in rural India, you may get the regulator’s okay. Is that business feasible?
Financial inclusion is both the economic, social and political necessity but I also believe that financial inclusion must be commercially bankable. Beyond financial inclusion, you need economic inclusion. And by that I mean, if you want to invest in the rural areas, it must be bankable through creating an economic environment.
I also believe what defines financial inclusion probably needs to go through some change. What is priority sector today may be different from what it was 30 years ago when it was created. For instance, should loans to infrastructure, tourism, health care, education be priority sector loans? There is no debate on the issue of inclusion but the debate is on what form it should take and how the last mile should get built out.
Is Deutsche Bank the best to build that out? Are business correspondences the best way to reach masses?
Should we pay a price for it? Absolutely. Should we be constructing the last highway ourselves? These are issues on which I would really love to debate.
Will locally incorporate your bank?
I think, regulators in many parts (of the world) are taking that route for better control and better governance. The RBI has frankly been ahead of the curve for many a time of the last decade in many ways -- in terms of macro prudential governance, interest rates and even the governance structure.
The IBA (Indian Banks’ Association) and the foreign banks committee of the IBA and individual banks have gone back to the RBI with suggestions. On what parameters does a wholly-owned subsidiary make sense? Should there be tax waivers on conversion? Should there be some balance between local versus global systems in control? As long as there are broad principles on conversions and as long as there is a level playing field as an outcome of becoming a wholly-owned subsidiary, we have no issue. Ultimately, we will do exactly what the regulator would ask us to do.
Is there a level playing field between the local banks and foreign banks?
When we talk about investment banking, equity broking, asset management, raising dollar financing, the foreign banks have all the rules and regulations to actually contribute to building a real franchise in India and helping corporate India. When we come to building a retail franchise in India, frankly the foreign banks don’t have a level playing field.
Are you blaming the branch licensing policy?
If you are asking me whether we believe that we don’t have enough branches, the short answer is yes. But for the rest, India is very welcoming to foreign banks when you look at the larger picture in terms of investment banking, asset management and insurance and not just as retail branch banking.