Deutsche proving a model of integration

A growing number of institutions perceive the ‘one-bank’ model, of which Credit Suisse has long been a strong advocate, as an effective way to try and capture the assets of the super rich, while a lot of work still needs to be done to rebuild client confidence towards big brands and advisers following the global financial crisis.

At the beginning of 2008, Deutsche Bank formalised the internal joint ventures (JV) between the Private Wealth Management division and the Corporate and Investment Bank, principally to address structural changes that were taking place at the very high end of the wealth segment, explains Salman Mahdi, global head of key clients at Deutsche Bank PWM.

“In many cases families would manage their own wealth almost as a side activity from their core businesses,” says Mr Mahdi. “This works fine in a long period of benign markets, but once we entered the 2008 crisis, people realised this was not a part time activity anymore.”

Many wealthy families hired investment and risk managers to set up their own investment operations or family offices. In order to serve these quasi-institutional clients more effectively, the German bank formed Private Institutional Client (PIC) desks, effectively a JV between PWM and the Institutional Client Group within the markets division. This covers all institutional investors for all the flow businesses in terms of trading, products, risk management and so on. The bank also established the corporate finance JV to encourage wealthy clients to access its M&A advisory and equity capital markets capabilities. Both JVs are operating globally, with desks in New York, London, Frankfurt, and Singapore.

Unlike a traditional institution, where the investment bank sales staff interface with the private bank’s advisers, clients now have direct access to the investment bank trading floors, subject to strict size and sophistication criteria, explains Mr Mahdi.

The new approach – where the relationship manager continues to oversee the entire relationship – is not an easy ride. The main potential issue is that many professionals treat their client relationship as the most precious thing in their work and they may be reluctant to share it with people in other departments.

“The cross-introduction culture is something we have to gradually cultivate – it does not happen automatically or very spontaneously,” he says, explaining that it has been very actively encouraged at the senior management level, both within the corporate and investment bank. “The incentive structure has been totally simplified. Whatever revenues are generated through these relationships are shared, generally equally, between the investment bank and the private bank.”

A SUCCESSFUL START

The integrated model is bearing fruit. During the first half of the year, more than 30 per cent of the global net assets of the private bank came through collaboration with the investment bank. “All the performance metrics that we have for the collaboration this year are running at about double of last year,” reveals Mr Mahdi.

The US and Asia particularly stood out as key areas for revenue generation in the first six months of the year, when markets were strong.

“Asia has been quite a strong IPO market in the first half of the year, and the connectivity between the investment bank and wealth management has helped capture a lot of those liquidity events that have taken place for companies or promoters that have listed their businesses,” says Mr Mahdi. Before joining Deutsche Bank in 2003, he co-founded Abraaj Capital, a private equity firm in the Middle East region, in which Deutsche has today a small shareholding and a board sit.

“If you are able to start a dialogue with an issuer or a family that is going to list its business quite early on, then the chance of us being able to effectively maintain that relationship through the wealth management functions becomes really good.”

In the US, large liquidity flew into the wealth business primarily through the M&A mandates, as families decide to divest businesses.

The IPO and M&A space are the two areas where there are “tremendous opportunities” for liquidity creation and for building strong relationships with the wealth management business, says Mr Mahdi.

If the core German operations are still the biggest in terms of absolute scale, Asia is the fastest growing part of Deutsche Bank. “There are hundreds of businesses in Asia that eventually will go public, which will create more liquidity for their owners,” he predicts.

Mr Mahdi’s objectives are to continue to grow the interactions between sophisticated, quasi-institutional clients with the corporate and investment bank, as well as to offer a broad range of the core PWM services to their top-end clients.

In order to achieve these targets, when he took up his new role in April, Mr Mahdi created a number of global structures, such as the key clients working group. This is a multi-divisional committee where people can have remarkable amount of dialogue between them inter-regionally, he says. It is a global “virtual community”, populated by about 300 key people at the bank, handpicked both from the corporate and investment bank and the private bank.

“A global operation is important because the ultra high net worth clients are keen to have much more access into markets, especially in-depth access into the high growth markets,” he states, citing his previous experience as head of the global South Asian diaspora at Deutsche Bank. “We can facilitate interregional dialogue and client to client dialogue in different parts of the world, as clients are looking for investment opportunities more in terms of their businesses, in private equity or in co-investments.”

German families want to have a much deeper understanding and exposure to Asia, while very large American families are keen to invest outside of the US, and are looking at opportunities across Europe and Asia. “For example, over the last few years, a number of large European and American families have invested heavily in Asian real estate, where they would typically look to banks like Deutsche to be introduced to leading families in that segment and potentially have co-investments or joint ventures,” he says.

While there have been no hires for the key client segment division so far, Mr Mahdi states he is personally working with each region to hire senior staff. “The main challenge is to have enough senior and experienced people to be able to work on this platform, because the opportunities are enormous in this space.”

Holding a client’s hand through the process of being a private family to a family business that gets listed in New York could take one and a half to two years and may require up t0 50 meetings with many different people, he explains. “This is not an easy business; it requires a tremendous amount of hard work and planning. You have got ultimately to be selective in terms of prioritising the deals you want to work on.”

Asked about growth targets, Mr Mahdi says he would like to reach his “aspirational number” of €500m, in terms of the franchise revenues that are generated from Deutsche Bank as a whole, from the collaboration across divisions on specific transactions. At least a third of that will go straight to the wealth management bottom line. Currently, the figure stands at around €300/€350m from zero a few years ago.

“Every family or client is so individual that you literally have a very tailored approach to each one of these. It is a very competitive environment and the past few years have not been helpful. But we are up to the challenge.”

Future Trends

Longer term, there will be a polarisation of clients, believes Salman Mahdi at Deutsche Bank. The high net worth or mass affluent segments will continue to work with large open architecture private wealth platforms, while the ultra high net worth families will focus on a few key providers.

During the global final crisis, wealthy families tended to spread their risk by having a number of banking relationships, but in the past couple of years there has been a consolidation of assets with the bigger names, argues Mr Mahdi.

The larger family offices will be much more discerning and will have a much deeper knowledge of the product and service capabilities of the banks they work with. And over time there will be more concentration of these relationships with the larger players, he foresees.

“The larger the family assets and the clients are, the more we will see a trend towards focussing on the core strengths of the institutions they work with. Hence, proprietary solutions are sought by the most sophisticated clients.”

Moreover, given today’s major issues in the global banking environment, people have started become much more aware of counterparty risk, in a way seen at the time Lehman collapsed.

“People have now become a lot more conscious about underlying counterparty and issuers," says Mr Mahdi. "That is very much part of their risk assessment.”

Salman Mahdi, Deutsche Bank