"Boring is the new sexy," says Rainer Neske, CEO of Private and Business Clients (PBC) at Deutsche Bank. In fact, what is currently going on behind the façade of Frankfurt’s skyscrapers is nothing less than a giant project with the potential to reshuffle the cards of the German banking industry, writes Anita Schneider
Deutsche Bank has a record of dreaming big. One of its current objectives is to become one of the top five European banks in terms of deposits by 2015.
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It is also aiming to earn more than £8bn in revenues with its private and business clients each year. The takeover of Postbank was an important and necessary step in order to achieve that financial gain.
Deutsche Bank was particularly interested in Postbank’s large customer base. At that time, Postbank was Germany’s biggest retail bank with around 14.4m customers.
But there were two further strategic aspects – firstly, Deutsche Bank had been forced to defend its territory due to the merger between Commerzbank and Dresdner Bank.
Secondly, the financial crisis taught Deutsche Bank the value of retail banking, which was to be able to absorb the losses of its investment banking arm in economically difficult times.
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By GlobalDataThe management, headed by the then CEO of Deutsche Bank, Joseph Ackermann, finally spent £5.1bn for its new subsidiary Postbank.
In return, Deutsche Bank increased the number of worldwide clients to 28m overnight, handling customer deposits of £141bn.
"We are creating a bank with new dimensions", says Neske, chief executive officer of PBC at Deutsche Bank.
"We are by far the leading private bank in our German home market. But that is not enough. The market expects us to exploit all advantages from this takeover and we will do so."
Project Powerhouse
In 2013 the company started the internal process it called, "Project Powerhouse" – the integration of Postbank into Deutsche Bank.
"We are going to achieve synergies in management", explains Christian Ricken, chief operating officer of Deutsche Bank.
"With regard to the central functions, we are building up one management team, monitoring and steering the private and business clients segment of Deutsche Bank and Postbank".
So far core policies and reporting have been aligned and a joint project organisation has been set up.
In April of 2014 the management reached one of the most important milestones of the integration process: the service company PBC Banking Services was founded.
Beforehand, Deutsche Bank and Postbank both had their own service subsidiaries, which were legally independent entities. In April they brought three business divisions together: Advisory Banking Germany, Advisory Banking International and Consumer Banking Germany were merged to form PBC Banking Services.
Advisory Banking Germany comprised all PBC activities in the German market under the Deutsche Bank brand, whereas Advisory Banking International comprised all of PBC’s activities under the Deutsche Bank brand in Europe and Asia.
In contrast, Consumer Banking Germany was mainly centred around the activities of Postbank.
10,000 employees work for the new PBC Banking Services. 6,000 employees came from Postbank and the remaining 4,000 from Deutsche Bank. They manage all kinds of back office work, such as processing mortgage financing and the supervision of personal loans.
Consolidation and efficiency
Deutsche Bank has also put a new IT platform into place. Called Magellan, the platform was developed in corporation with SAP and was put into practice in July 2012.
Magellan comprises the entire IT infrastructure as well as all of the clearing and settlement processes of the PBC’s Business Division in Germany. Step by step, all of the PBC accounts and business processes will be migrated to Magellan by 2015. The management then expects the new platform to be fully operational, serving more than 2,000 Deutsche Bank and Postbank branches.
Estimated program costs are about £810m until 2015, but the Deutsche Bank managers believe this investment will soon pay off.
"With Magellan we will be able to carry out 8bn transactions per year, 40m phone calls and 32m business transactions," says Christian Ricken, Deutsche Bank’s chief operating officer.
The bank is aiming to save £624m every year due to the Postbank integration. About half of the planned savings are to be achieved through lower material costs, while the other half is to come from a reduction in labour costs. Over the last three years, 1,000 jobs have been cut and further 300 employees will be laid off by 2016.
Deutsche Bank’s objective is to increase PBC’s revenues by £891m every year from 2016 onwards. The bank says the Magellan platform will be the key enabler to achieve that goal, accounting for approximately 60% of savings.
Achieving economies of scale has become the most important principle, not only in the banking industry, but in almost all kinds of industries. This means that by growing, a firm can expect to reduce its average costs and become more competitive.
This explains why large firms are usually more efficient than smaller ones and in many cases, smaller companies are being pushed out of the market.
"There is a minimum scale for efficiency. It is a little misleading to think you can be small and globally competitive," says Deutsche Bank’s co-chief executive Anshu Jain.
"Consolidation in the banking industry is inevitable."
Over the past years, Deutsche Bank has constantly grown, examples are the takeovers of Berliner Bank and norisbank, its part-ownership of Huaxia Bank, its acquisition of Sal. Oppenheim and finally the investment in Postbank.
"It has taken a long time to get the consolidation process started in Germany," says Neske.
"There were not many options out there due to the high market share of cooperative and savings banks. With the takeover of Postbank we finally reached a critical stage."
Same back office, different brands
Two banks that could not be more different are growing closer and closer together.
Deutsche Bank’s customers tend to be wealthy private individuals with high incomes. In recent years, Deutsche Bank has focused on global investment banking, dealing in complex financial products.
On the contrary, Postbank caters for the man in the street. As Ricken says: "Consultancy and specialisation are not Postbank’s primary focus. The bank concentrates on simple and cheap products."
Two totally different brands under one roof bring up a challenge: How shall these banks mould together without losing credibilty?
Looking at other companies to see how they have managed a similar challenge is one of the basic pieces of advice consultants tend to give. Deutsche Bank did exactly the same. It found itself one very successful role model in Volkswagen.
The company has developed an expertise in achieving economies of scale with its production strategy "Modular Transverse Matrix" (MQB), a standardised technical platform.
All of the group’s small and medium front-wheel-drive family models, including the latest generations of the VW Golf and Audi A3, are being designed around MQB as their base. However, since the start of MQB, Volkswagen has managed to keep strong brand identities alive and to differentiate them from another.
What is the secret? All of these cars share important components but visually they look entirely different.
That’s exactly the same approach Deutsche Bank is following. The company is relying on economies of scale only at the back office end, not at the shop front. It is all about standardising those areas the client won’t notice while sticking to the crucial values of a brand at the same time.
"Both banks will keep their strong identity," says Neske.
"There won’t be a brand dilution. It would be suicidial because a client of Deutsche Bank has his reasons for not being a Postbank client and vice versa. Only under this condition does a two-brand strategy make sense."
Tough times ahead
Deutsche Bank has already managed to take some major steps in the integration process. But there are still some tough times ahead.
In 2013, the costs of integration, at £1.2bn, seriously impacted the balance sheet of Postbank.
Profits before tax were £257m, but the figure would have been £405m without the costs of integration. Despite this, Frank Strauß, chief executive officer of Postbank, claims that there is no reason to worry.
"We have proven once again how successful our business model works, even in difficult times. We achieved profitable growth and security in the customer business. With regard to the integration into Deutsche Bank, we made significant progresses, particularly with the IT system Magellan."
Deutsche Bank now has to take some further steps to bring the integration process to a successful end. Firstly, the bank must prove that there will be no brand dilution. It has to manage the challenge of merging the back office of Deutsche Bank and Postbank together and at the same time seperating both brands clearly from one another.
A strong and diverse customer approach is a must, especially at a time where the financial industry faces a lack of trust.
Secondly, Deutsche Bank has to achieve its financial goals. Up til 2015, Deutsche Bank’s targets are revenues of over £8bn and an annual income before tax of more than £2.4bn.
The integration of Postbank, with the potential to yield significant synergies, is Deutsche Bank’s best ace card to catch up with Europe’s leading retail banks, such as Santander, BNP Paribas and Barclays.
