Deutsche Bank : Fabrizio Campelli, Head of Corporate Bank and Investment Bank –dbAccess European Champions Conference Transcript

Deutsche Bank AG

dbAccess European Champions Conference

Wednesday, 22 May 2024

Transcript

Speakers:

Fabrizio Campelli, Head of Corporate Bank and Investment Bank Benjamin Goy, Head of European Financials Research

Tim Rokossa, Co-Head of European Company Research

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Tim Rokossa	Thank you very much and welcome all of you guys
	to the 27th edition of our German Equity
	Conference. It's pretty remarkable that we
	managed to do this over 27 years, and obviously
	this conference went through quite a few changes
	over all of those years, as did the environment.
	We originally started here in Frankfurt 27 years
	ago as a very German-centric conference. Then
	we moved that conference to Berlin for political
	reasons largely, to be very close to the German
	politicians. We expanded it to a DACH format over
	the years, and then post-COVID we took it back to
	Frankfurt just to accommodate for the strange
	working environment that many of us live in today.
	And now what we have here today is a really
	impressive line-up. These type of things really
	only work if a lot of people work very well
	together, so a big thank you to the conference
	team here on the ground specifically, but also
	everyone involved.
	And to get you excited for the next two days,
	there's a couple of stats that I'd like to throw at
	you. The first one is we have about 200 investors
	here from basically everywhere in the world. We
	have 74 of the leading corporates that are having
	meetings. And the one stat that I would like to
	leave you with is that this team managed 1,826
	meeting requests. It's a pretty impressive number,
	by any standard.
	And we have a couple of things that you can look
	forward to. There will be fireside chats in this
	room with all the major executives of the
	corporates attending this conference. There will
	be panels next door with our CEO Christian
	Sewing and our previous Vice Chancellor Sigmar
	Gabriel about Europe specifically in geopolitics.
	There will be a panel on defense with two
	companies that we helped bring into the stock
	market over the last years. There will also be a
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	discussion with Sigmar Gabriel, most of you guys
	know that very prominent figure in German
	politics. And then last but not least, tonight there's
	going to be a panel with our partner for IT, Bernd
	Leukert, as well as the EMEA president of
	Microsoft, talking about the AI efforts of
	Microsoft, obviously involving ChatGPT and
	OpenAI.
	So all of this you can look forward to over the next
	two days. We at Deutsche Bank, we are all about
	client focus, and two of our most important client
	groups are here at this conference to connect to
	each other, investors and corporates. Therefore, I
	couldn't imagine a better discussion partner to
	open up this conference than Fabrizio, who
	oversees the Investment Bank and the Corporate
	Bank for us.
	Fabrizio looks back on an amazing career at
	Deutsche Bank over the last 20 years ever since
	joining from McKinsey. And he will be joined on
	stage by Benjamin Goy, our Head of European
	financials.
	And with that I would say Fabrizio, Ben, the stage
	is yours. Thank you very much.
Benjamin Goy	Good morning and warm welcome also from my
	side. And thanks for joining us, Fabrizio.
	Tim already mentioned it, you are the head of the
	Corporate Bank and the Investment Bank. You
	have multiple touch points with the corporates
	and investors attending today, so indeed makes
	you an ideal candidate to start this conference
	with. Many of you will be familiar, if not you will
	soon be, the format of this fireside chat as well as
	the sessions thereafter. We will start with a couple
	of questions from my side and then we also open
	up to Q&A from the room.
	We already heard we have many different
	companies from different industries attending, but
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	one thing is typically a topic for every industry,
	every sector, is macro. And why don't you start
	giving the framework how you see the world at the
	moment in this actually pretty unprecedented
	times and volatile times actually?
Fabrizio Campelli	Thank you, Ben. And thank you all for being here.
	It is actually great to see the format of the
	conference being so different and continuously
	improving year after year. So I'm actually really
	excited about today.
	The macro environment, and speaking both to
	institutional clients, corporate clients who are
	watching the markets, is interesting. Starting to
	show signs of improvement, we're starting to see
	those steps that we were all hoping to see coming
	through. We are seeing GDP growth stabilizing,
	inflation, which was still double-digit not so long
	ago, starting to really come into the much closer
	touching distance from our target levels, from
	central bank target levels. We're starting to see
	market activity regaining some confidence.
	It's a market environment that is also showing
	great resilience relative to what we expected.
	Despite the significant interest rate hikes we have
	seen that economies have remained strong,
	unemployment has remained at an all-time low,
	4% in the US, 6% in the EU, very low levels.
	The financial system has shown resilience. The
	fear that the most significant tightening of interest
	rates that we have seen in 40 years may break
	something in the financial sector actually didn't
	occur. Yes, there were some significant issues in
	pockets of the financial system, but really at the
	end it was in very contained ways.
	So all of this is positive and encouraging.
	However, there are also some signs of concerns
	and we see them as still lingering very much on
	people's minds. Partly it's because it is obvious
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that we have had two extraordinary shocks within two years at the global level, the pandemic and everything that it entailed as well as the Ukraine invasion and how it changed the balance of some of our key assumptions, particularly corporate assumptions around energy prices, supply chains and so on.

Those have caused our global GDP trend lines to be materially affected. We are still about 1% below the pre-pandemic GDP trend line in the US and 5% below in Europe. Those are big, big gaps to recover the trends from.

We're also seeing that inflation is not entirely defeated. We see that there is still a fair amount of risk, and that can rear its head up depending on how things could play out from here.

Geopolitics is still keeping people very worried and it used to be very focused on Ukraine-Russia, clearly now extending with China and the US continuously looking at their relationship. It is probably more constructive than a few months ago, but still kind of looking like in managed decline. We see the Middle East becoming more problematic with economic consequences. And the debt levels are at an all-time high. So these are all indicators that actually we are not out of the woods yet. There is some positive shoots, but there is still a lot of risk for downside.

So the sense I get, and even speaking to market participants, to investors, to our clients, there is a sense that there is no time for complacency. Wherever we look there could be a bounce back, particularly of inflationary pressures that could put us under a lot of pressure.

So while we have revised upwards some of our outlooks for GDP growth, and were quite constructive both on Europe and the US and Germany on outlook, I think there are signals we watch very, very closely with some apprehension.

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Benjamin Goy	You already mentioned parts of it, so when you
	look at it geographically, you mentioned that we
	are more positive on Germany, so much more a
	glass half full perspective. But a couple of more
	words on Germany, Europe, US, the broader
	environment, if you want to go a bit more deeper
	in the regions?
Fabrizio Campelli	Sure. So US, we see a growth level in 2024,
	comparable to 2023. This kind of our economists
	are forecasting a 2.5% or so GDP growth level for
	this year, a bit lower next year, but still on a very
	positive trend line.
	So clearly we went from being quite worried about
	the hard landing and a clear recession risk to
	being much more constructive about the US
	growth prospects. We expect a normalization of
	interest rates happening over the course of the
	next year and a half towards sometime target
	inflation level reached in the US around mid 2026.
	With an unemployment level hovering around or
	maybe slightly above 4%, so a healthier state.
	Clearly the elections later this year could in some
	way alter the picture, depending on the extent to
	which there could be a change to the approach,
	particularly to fiscal policy. But this is kind of how
	we see it.
	In Europe, again, more constructive. We see
	growth moving out of stagnation in Europe.
	Probably still half a percentage point of growth
	forecasted this year, but it's actually hiding the
	fact that the momentum, the trajectory is quite
	positive. We expect the second half of 2024 to be
	a much richer growth opportunity with exports
	rising, with Europe feeling healthier than it has
	been in the past.
	For Germany, we have recently revisited our
	forecast again to the positive. We see some
	positive momentum in Germany, because a
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	number of the dynamics that are playing out and a
	number of expectations we have, particularly on
	interest rates, would benefit Germany quite
	materially. We revisited our forecast for Germany
	to a fairly positive GDP growth for 2024 of about
	0.3% this year, but with a few of the signs actually
	pointing to resilience and the trajectory recovering
	in the right direction.
Benjamin Goy	That's certainly good to hear. And the other big
	topic these days on the last actually two and a half
	years, of course interest rates. You mentioned it,
	inflation, you mentioned that the last mile is a bit
	more challenging potentially. But what's your
	outlook for the interest rate environment for the
	big currency blocks?
Fabrizio Campelli	This has kept us so busy. At the beginning of the
	crisis, so after the pandemic and before Russia-
	Ukraine, DB had called for a clear inflation wave
	that would've led to very material hikes and
	interest rates.
	Once you make that call and you have conviction
	behind, then the rest of the narrative is laid out.
	The hikes will go to a certain level, terminal rates
	will be higher than the core inflation rate if you
	want to tame it. All of that proved right.
	Calling it the other way now of when we will see
	normalization, it's much, much harder. And so we
	are all watching this very closely. We all have our
	point of views, but it is clearly a much more
	difficult task. And in fact, we are seeing our
	investors and our clients in the market having the
	same apprehension of not seeing direction, not
	having that clarity makes it much harder to call.
	In general, we would see it very unusual for the
	ECB to start moving before the FED. Historically,
	they've done that less yet. Yet, we do expect that
	this is what will happen this year. The ECB has too
	many indicators pointing to the fact that it may be
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the right time, properly soon in the next month or so, to start easing. And that's because growth prospects in Europe are lower than what we've seen in the US. All things equal, the US is enjoying a much higher yield from productivity gains. So their growth push, the two and a half percent GDP growth outlook I described earlier has a lot to do with productivity, which Europe has not enjoyed. So the high interest rates are currently really holding Europe back in ways that the US doesn't have. Hence, it would make more sense to see the ECB and possibly the Bank of England moving. We've already seen Sweden and Switzerland already act, so the European environment is one that is probably more ready to do that outlook terms. We expect the numbers to drop over the next, I would say, year and a bit until early 2026, maybe end of 2025 to a 2% kind of policy rate level for the ECB, from the current level of around 4%.

The Fed is a bit more in trouble right now. The initial expectation that inflation was transitory was driven by a couple of indicators which led the Fed to take their time in hiking. It's actually playing out the other way around now. What if those reductions of headline inflation levels are driven by some transitory effect, but actually core inflation is still a bit stubbornly sticking to higher levels? And in fact, we've seen that the last three prints have been heading in their direction, but above expectation and partly because there are some dynamics in the inflation levels that may suggest that there may be a sustained inflationary risk. The Fed has been very explicit about it, particularly the 4% unemployment level. They don't want to run the risk of easing and then having to hike again. Should there be a surprise, that would be a real problem.

The risk of something breaking the financial sector seems to be contained. So we do not

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	expect the Fed to cut rates materially. We went
	from expecting six cuts in 2024 to properly now
	only one in December this year, maybe two in the
	first half of next year, and perhaps three at the
	beginning of 2026. So from the five and a quarter
	level that we are at right now, we probably expect
	to see a drop to, according to our research teams,
	three and three quarters fed fund rate level by
	sometime in the spring of 2026.
	Now there's one dynamic though that I would like
	to highlight. I think the ECB will be watching this
	very closely. The risk of the ECB disconnecting its
	rates policy too far from the Fed is something that
	will worry many Europeans and certainly will
	worry the ECB, because the risk of a weaker euro.
	An excessively weak Euro also may cause inflation
	to pick back up, may cause some of the recovery
	to not work as well. Hence, I think the outlook for
	2025 for the ECB will be more complicated than
	the task at hand for this year.
Benjamin Goy	Fair enough. Now looking at the two divisions,
	Corporate Bank and Investment Bank, how does it
	impact falling rates or higher for longer rates?
	How does it impact your businesses?
Fabrizio Campelli	Deutsche Bank has four divisions - Corporate
	Bank, Investment Bank, Private Bank and Asset
	Management. I think the two most affected
	divisions are obviously the Private Bank and the
	Corporate Bank, because they have a very high
	reliance on net interest income. Given particularly
	euro denominated deposits are very relevant for
	the Private Bank. The Corporate Bank has a better
	currency mix, but euro is still very important and
	hence the European interest rates policy will have
	a very big bearing on the performance of the
	business. We've listened very carefully to what
	President Lagarde said around the interest rates,
	will properly have a phase of taking the edge off
	as she expressed a bit more elegantly, and only
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	then a phase of normalization. I think that taking
	the edge off phase, that taking interest rates down
	once or twice over the course of this year will likely
	result in a reduction of net interest income for
	divisions.
	We have already seen it in Q1 of this year. The
	Corporate Bank has reduced its net interest
	income and that was only partly offset by non-
	interest rate sensitive revenues coming into the
	division. And while it has been quite successful
	that revenue substitution is a problem that is
	common to all the corporate bank and the retail
	banks.
	There have been a few areas in which we have
	used the time wisely as interest rates have picked
	up significantly and the deposit betas, the transfer
	of higher interest rates value to deposit holders
	was happening more slowly across the street than
	expected. That excess income has been invested
	in revenue streams on the non-interest sensitive
	parts of the business, which is now showing
	results on the payment infrastructure. Merchant
	acquiring infrastructure are trust and agency
	services, which have a lot of fee commission rich
	parts of the business. So that is going to continue
	to be a key theme for us and other corporate
	banks. But at DB, that strategy is starting to pay
	off and that's why we are seeing that overall the
	performance of the business is staying ahead of
	our original plans, despite deposit beta starting to
	bring the NII levels down further than expected.
Benjamin Goy	That makes sense. And we see that indeed across
	the industry there is from net industry income
	shifting to non-interest income ideally. Maybe
	zooming in a bit more on the Corporate Bank.
	Other than the cyclical factors, as you mentioned,
	there's lots of structural investments going on.
	Could you speak a bit about multinational
	corporates? Corporate cash management is one
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