Joshi, appointed head of Deutsche Bank‘s institutional client group for debt in 2015, oversees all of the German lender’s fixed-income sales activities, as well as listed derivatives and clearing. He spoke to FN on November 29.
FN: How have you been getting Deutsche Bank’s fixed income house into shape?
Dixit Joshi: We needed to make the business model more efficient. My focus is on the digital and electronic agenda, and on helping reap efficiencies in the back-office. I am also focused intensely on balance sheet management, ensuring capital is tilted towards doing business with the highest RoE [return on equity] and with the biggest clients.
What we announced as part of Strategy 2020 was really about making ourselves leaner in a number of ways, and driving a higher return-on-equity through two key things. One was reducing the client perimeter. This was around the tail of clients that one accumulates over the years, which have minimal transactions a year, minimal revenue a year, even though they might have a minimal balance sheet usage a year. There is an administrative burden that comes with that.
[FN note: On December 2 the bank issued a memo saying it would cease providing coverage for about 3,400 active clients.]
The top 500(ish) clients drive the bulk of our wallet. If you look at fixed income and look at the largest clients, by nature they’re multi-asset, global and require a full suite of services.
What was the other key measure?
The second was to look at the product perimeter and those products that do not make above-hurdle-rate RoE, such as uncleared single name credit default swaps – which was a large user of capital and wasn’t economic for us – and parts of the residential-mortgage-backed business in the US.
Out of roughly 25 to 30 product lines, we have de-prioritised around five and re-allocated capital elsewhere.
Why are you confident clients will want to trade with Deutsche Bank in the future?
If you look at the first nine months of this year, in what was arguably a difficult environment for fixed income, within that Deutsche Bank was ranked fourth in debt sales and trading. You’ve got three American firms above us, and one below us in the top five.
We are a leading fixed income house, and clearly the largest and only meaningful non-US player in that bracket. What we hear from our clients quite often is they really want a European firm to continue to provide services like this because they wouldn’t want to just be dealing with firms from one region. They like a diversity of players involved providing them liquidity.
In the main, the largest global clients need a diverse set of services, they need to hedge interest-rate risk, transact FX, and they may need M&A advice on the side, as well as payment and transaction banking services. The largest client set globally will want to deal with banks that can provide all those services as a one-stop-shop.
And what are your thoughts on the fixed-income markets as a whole?
It is my base view, if you look at collective changes in the market structure in the last eight years, we are setting ourselves up for a marketplace that will be transacting a lot more volume. One, it is simpler and more standardised. Two, it is more electronic and three, counterparty risk is being removed from a large part of the market through clearing, which sets you up for greater volumes with minimal marginal costs.
Over and above that, we now have divergence in central bank policy for the first time in eight years and increased volatility across the globe, which I think will lead to corporates and institutions being more active with risk management going forward.
What do clients want from a bulge-bracket bank these days?
Clients still want content, such as research, trade ideas, pre-trade analytics, market structure research, and also importantly liquidity, which typically only the largest banks can provide in the sizes required, as they tend to see all diverse sets of supply and demand. Clients also want it backed up with a robust platform, to help with the post-trade workflow.
Capital provision for clients will also continue to be part of our core offering. We may do so differently, as we move to more electronic market-making.
You mention content and research, are you concerned about new European rules forcing investors to make separate research payments?
Having seen the equity experience, where equities went through the entire unbundling experience a long while back, that has forced a robust measurement by buyside institutions of exactly what they spend on research. Conversely, it also meant banks had to become better at measuring the amount of research time spent, the amount of corporate access offered – really the amount of content delivered for clients.
I think you’re going to see the same thing in fixed income, where we will rapidly see similar metrics being adopted. The difference though, is the number of fixed-income research people is quite limited when compared to equities. Fixed-income research by nature lends itself to a more efficient model.
What are your views on disruptive technologies?
It feels we are now at the end of the beginning in terms of technological change and we are on the verge of seeing some groundbreaking developments. We need to see proof of concept, and evidence of it working in practice, but blockchain is an obvious one and there are definitely problem sets which that will be entirely appropriate for.
The place where the industry needs a huge amount of change is in the post-trade world; payments, settlements, reconciliations, margin, managing workflow between banks – and managing workflow between bank and clients.
All of that is ripe for disruption and there’s a whole host of fintech players that are attacking portions of that problem set. We work with them, either directly through equity stakes, industry-wide partnerships, or through our innovation labs.