You became co-heads in June. Perhaps we can start with some details on your backgrounds — what brought you to your current roles?
Cloete: Prior to partnering with Gunit as co-CEOs in the Asia-Pacific region, my career background was for some 30 years in fixed income-related roles, the past seven heading up Deutsche’s FX business globally and global finance. I had spent a good deal of time in Asia throughout my career and we had success with the team in developing our FX business in the region.
Chadha: Alan and I knew each other well when I previously headed Deutsche Bank’s franchise in India, for the past eight years. Prior to joining Deutsche Bank, I was CEO of IDBI Bank in India and previously with Citicorp Securities in the US and South Asia.
Alan, as previous head of the bank’s FX and global finance business, it would be interesting to get your perspective on the opportunities in Asia through that prism.
Cloete: The emerging market status of most countries in the region obviously presents many opportunities, particularly if you have a large geographic footprint in the region and scale in FICC [fixed-income, currencies and commodities] and transaction banking businesses. We are fortunate to have both. It gives you a seat at the table with regulators as they consider options to develop their markets and it’s also an considerable advantage with clients to have a well-developed local perspective as well as global credentials. One large opportunity is in the internationalisation of the renminbi. This is in my view the most important development in markets since the introduction of the euro and will likely be the most important during the next decade.
What are your views on the broader regulatory developments, challenges and opportunities ahead and what do you think the impact will be on the banking industry generally.
Cloete: There is no doubt we are seeing a fundamental change in the way banks view matters such as capital development, capital allocation and compensation in the recent environment. The drivers of these changes are well documented — Basel III, restrictions on business activities such as under Volker, additional taxes and levies on the industry, and community pressures. These factors have created headwinds for the industry to generating the returns of the past and as a result banks are reengineering. Deutsche Bank has fully embraced this new environment and is recalibrating its business to focus on clients, core business competencies, capital allocation and generation, costs and to align its culture in line with societal values.
Chadha: Our view is that we will see consolidation in the industry and that we are taking the steps necessary to ensure Deutsche Bank is one of the global universal banks that will be a winner in this challenging environment. The starting point was from strength — the bank is exceptionally well positioned in Europe; has a good position in emerging markets globally; has a well ranked IB platform; is well funded; has a very robust entrepreneurial culture; and proven strength in risk management. However, we recognise that we have potential for greater operational efficiency and the cost-saving targets we have set — €4.5 billion by 2015 — are significant but realistic. While we will be strategically investing in Asia where profitable opportunities exist, we will be focused more than ever before on efficiency and quality of earnings.
What are your thoughts on the competitive landscape in the region?
Chadha: The level of competition is significant in Asia as the industry focuses globally on where growth will stay strong during the coming years. All eyes are on Asia to deliver growth. However, some businesses in Asia are already over-banked and sub-scale participants or those coming late to the region will find it difficult to compete. We can already see this as some participants have already withdrawn from equities and others will reduce their fixed income businesses. And some banks are shrinking their country footprints. This creates opportunities for institutions such as Deutsche who have scale and stay universal banks. Deutsche is somewhat fortunate that we have a significant footprint of in-country licences, invested capital and high quality local management throughout the region. This is not easy to replicate. All our businesses have scale and all are profitable. I don’t think we are looking for more than one or two licences in businesses in the region at the moment. So we are well placed in that respect.
Cloete: There is no doubt that local banks are becoming increasingly more sophisticated and involved in capital markets activity, for example. They also increasingly have regional or even global ambitions. Deepening of capability in the financial sector is a strongly positive development as it will drive capital markets development and flows, more investment activity and generally delivers greater product optionality for clients across the spectrum. Rather than viewed as direct competitors, as such, local financial institutions are more often clients of the bank as counterparties or in an advisory capacity. The development of financial flows and increasing market sophistication also generally plays to Deutsche Bank’s existing business strengths.
What is your outlook for 2013 capital markets?
Chadha: At a macro level our house view is that global growth is bottoming out and will accelerate from the second half of 2013. We are projecting global growth in 2013 of 3.1%, with US at 1.9% and the eurozone in slight contraction. The upside is in emerging markets, so that has the potential to play out well for business growth here in Asia Pacific. The negotiations and resolution or otherwise related to the US fiscal cliff is obviously a key risk and eurozone outcomes the other. We however remain positive on the upward trajectory of capital markets in Asia in 2013.
Cloete: We expect that China growth will accelerate in the second half of 2013 and this has the potential to drive equity capital market activity from there. We continue to see considerable interest from clients seeking to come to equity markets should pricing becomes more attractive, meanwhile interest in debt market issuance will continue to be strong. There is still considerable investor demand for quality deals and a lot of money is still on the sidelines.