SSSIHL, Brindavan Campus

A Study of Deutsche Bank

The study analyses the bank from the perspective of 4 Ps and the current regulatory framework in India.

Arjun N.

13202

The study speaks about the factors that were unique to the bank that helped the bank to sustain its profitability in the sub continent even when its peers have wound up their operations. It also highlights hoe the bank went around the regulations to make its presence felt.

Introduction:

India is counted as one of the prime emerging markets. There is a robust demand of banking services in India. In emerging markets, banking reaches about 37%of the population, compared to a 50% penetration rate for mobile phones. These facts highlight the opportunities in the market and the promise that alternate channels hold forth for the banks. Demographic shifts in terms of income level and cultural shifts in terms of life style aspirations are changing the silhouette of the client. He wants global exposure. When large numbers of banks scramble for a slice of the wallet of the individual just by offering commoditized products, foreign banks target a niche where there are relatively less number of players but large scope.

Role of Foreign Players vs. domestic players in Indian Banking Sector:

The aspirations of an average Indian is kindled by the presence of global banks in his neighborhood. The key differentiator between a local bank and a global bank is that the game of local bank is in the interest spreads whereas the foreign players make profits from the fee they charge for their services. Since a foreign bank offers service as its core product, the winner is the person who understands the customer’s needs and creates a unique place in the minds of the customer. The main verticals for a foreign bank would be its treasury operations and the Investment and wealth management functions. Since the foreign banks are specialists in these fields.To give a picture that shows the difference in the operations of the local banks and the foreign banks take a look at table 1.

Table 1: Differences in the operations of Indian and foreign banks.

The table shows a very low market share in the credit market for the foreign banks. As stated earlier the reason for this is that the foreign banks do not offer these services because their core competency lies n their global expertise and knowledge and not in the local credit behavior.

Table 2 compares the profit margin of Indian banks and foreign banks. The banks that provide services charge a premium for the specialized and customized services and the competitive combination of the quality services and low cost due to technology gives the foreign bank a huge profit margin.

Table 2 Differences in NPA ratio

In this context let us see how well Deutsche bank fares in offering its services to the customers. To evaluate Deutsche bank let us study the 4Ps of marketing in respect to the bank. Deutsche bank:With decades of experience in the Indian market, Deutsche bank has carved out a name for itself for providing specialized services for the Indian elite. Its focus never shifted away from leveraging on their global expertise even when its peers were testing rough waters in the Indian market by offering various retail products. Table 3 highlights the fact that the bank wanted to be best in what they were good at and not to dilute their image by aspiring to be everything for everyone.

Table 3 Niche areas of Deutsche Bank

This focused approach has bestowed laurels on the company (Annexure I). Credit goes to the strategy of the bank which resisted the temptation to enter the retail segment when all its peers were doing so. The bank in fact decided to sell its credit card operations in year 2005 to minimize its exposure to retail customers. The bank has the least NPA percentage because of its limited exposure to the default risk. The high NPAs were a cause for other foreign banks to wind up. Now, in 2014 the revenue from the bank’s retail operations has doubled. The bank has created a blue ocean for itself where there are no competitors; the competitors have closed down shops in the country.

Growth Enablers for Deutsche bank in the Banking Sector:

Alternate Channels: Low transaction costs of alternate channels like ATM, internet and mobile channels and the ability to provide banking at customer’s doorsteps has encouraged banks to use these channels in an effective way. Deutsche bank has made the process of availing a loan or opening an account with the bank paperless. It has capitalized on its technological expertise. By, branching out through the online and mobile banking venues it has increased its customer base as well as created an image for itself as a tech savvy bank.

Technology as a differentiator: In the last few years, technology has served not only as a tool for improving products and processes but also to reach out to the masses in a cost effective way.

Deutsche Bank:

Segmentation and targeting:The HNIs and big corporate are the segments the bank is targeting. With the set of products the bank efficiently delivers, these are the people who would need their services. The international presence of the bank expands its segment to all global Indians who have any transactions abroad. To be specific, businessmen, MNCs, SMEs, HNIs who require wealth management services and students who study abroad are the targets of the bank.

Promotion:

Customer is the most important person in the whole marketing process. He is the cause and purpose of all marketing activities. According to Prof. Drucker, the first function of marketing is to create a customer or market

Deutsche Bank promotes itself to be a bank that performs consistently to match the expectations of the customers. The bank strives to be customer friendly. The range of products that the bank provides and the simple processes that form part of the delivery all are attuned to the one single goal of making the bank customer friendly.

In banking, the customers must be ensured that services provided by a particular bank have been designed to give them maximum value of their money. The existing perception is that, Public sector is more reliable but not so good in the quality and innovativeness. Private sector is not considered so reliable, there may be hidden charges in the services and false and misleading information in the advertising but they are better in the service quality. This creates the difference between promotional strategies adopted by Public and Private Sector Banks.

Pricing

Deutsche bank has ensured transparency in its pricing by clearly disclosing all the charges inherent in a product. The quality of service enables the bank to charge a premium and still give a feel to the customers that they are getting value for money. The services are costly compared to other foreign banks like Standard Chartered, but the quality of service attracts customers.

Table 4: SWOT analysis of the bank in relation to other foreign players in the country.

Differentiation:The cash and risk management business has been the niche area of expertise for the bank Many corporate are now looking at cash and risk management in a different, more holistic light, taking

Strength1.Strong brand name and good financial position.-Largest money market

player in India.2.Global Expertise.3.Strength in wealth

management.4.Diverse and wide product portfolio.5. Largest foreign

exchange dealer in the world

Weakness1.Intense competition

from other leading banks2.Not a strong player in

the retail arena.

Opportunity1.Untapped market in India. Even the urban population aspires to

have relationship with a global bank.

2.Diversifying portfolios for customers

Threats1. The new banks in India

can give a togh fight from technology front.

2.Changing governmentt regulations and financial

crisis like recessions.

a strategic approach to developing structures that will assist in driving growth but also in providing contingency arrangements in case of difficulties arising in short-term credit markets.

Products

Deutsche Bank has also continued to develop new products and solutions to meet changing client needs. For example, the FX4Cash platform, Deutsche’s cross-currency payments solution launched in 2008, has been enhanced over the past 12 months to include the addition of receivables functionality and the expansion of currencies it covers from 75 to over 120.

Deutsche Bank’s Private Wealth Management franchise has made rapid strides in the last few years to be counted as the top player in the country today with total assets under management (AUM) of over USD 2bn as of June 2012.Deutsche Bank’s focus on offering innovative financial planning and investment products and services to high-net-worth individuals in India has paid dividends in a country that is today amongst the fastest growing markets in the world. Asset ManagementIn India, Deutsche launched its Asset Management business in 2003, followed by the launch of one of the leading European fund managers, DWS, in mid-2006. As of April-June 2012, this division had AUM of USD 2.4bn.

The importance of delivering liquidity and markets to clients in a way that satisfies their risk management and investment requirements has become paramount and will ensure that multiproduct single-dealer sites such as autobahn® will co exist along side the existing and new multi bank platforms that emerge. It is appropriate to speak on Places of the 4ps here. It is the online presence and the reach the bank has through mobile banking that enables effective delivery of products. Autobahn is a revolutionary innovation in that sense.

Integrated financial services provider in India: Deutsche Bank Group has successfully launched several new businesses in India, reflecting its desire to engage with a larger population of clients across the country. Building on its dominant Markets (debt and derivatives) and leading Global Transaction Banking (cash management, trade finance and custody) franchises, Deutsche Bank Group has gained significant market share in investment banking, institutional equities broking, asset and private wealth management, retail banking and business processes outsourcing.

"We are delighted to receive this recognition of our efforts over the past year from the readers of TMI. Innovation and excellence are attributes we aspire to when delivering solutions to meet our clients’ cash and risk management needs,” says Marilyn Spearing, Global Head of Trade Finance and Cash Management Corporate at Deutsche Bank’s Global Transaction Banking.

Global Transaction Banking covers Deutsche Bank’s cash management for corporate and financial institutions, trade finance business as well as trust & securities services.

Cash Management: Deutsche Bank is a leading cash management provider in India, offering accounts, payables, receivables and liquidity management. Trade Finance: Deutsche Bank’s dedicated trade finance and risk advisory group offers clients innovative, structured and risk-mitigating product solutions. This is achieved by combining the advantages of an extensive range of international trade products which enable clients to seamlessly manage their commercial trade transactions.Retail BankingDemonstrating its long-term interest in India’s retail banking market, the Bank launched its retail banking business in India in late 2005 in its first go-to-market initiative outside of Europe. The banks retail presence has doubled in the previous year 2013. Ravneet Gill says that the bank is keeping a close watch on the quality of the assets.

Table 5 Comparison between PSB, NewPvtSB and Foreign Bank.

Regulation for Foreign Banks in India:

Let me point out one or two key regulatory bottlenecks for foreign banks in India.

1. Establishment of Banks:During the first phase (which continues even today), foreign banks are permitted to establishpresence by way of:

SBI Deutsche ICICI

• Setting up a WOS or conversion of the existing branches into a WOS; or• Branch; or• Investment in a weak private sector bank up to 74%.

2. Capital requirements• The minimum capital requirement is of INR 3 bn (approx. US$ 70 mn)• Capital adequacy ratio of 10% is to be maintained as against 9% for foreign bank branch)

Implication of these regulations is that the bank cannot fall upon the capital of the parent bank in case of emergency. The bank has to rely on local deposit collection to pursue lending activities. The safety of the deposits of the local depositors is also taken care of by not allowing this deposit to be used for the operations in some other part of the globe.

BranchThe minimum capital requirement for banking branch licence is US$ 25mn, which is to be brought in upfront. There key criteria for setting up of a local bank branch or a foreign bank branch does not vary much except for that the permission given for the new branch openings are low for . There is a commitment as per the World Trade Organisations that the central bank should allow for a minimum of 12 branches in an year.Implications:In the age of virtual banking, need for a physical branch is decreasing at a rapid pace though the traditional Indian customer may seek physical presence for developing faith in the bank. The demographic shift the country is currently undergoing may turn the table around for the foreign banks by completely eradicating the need for physical presence.

Priority Sector LendingBanks in India are required to lend a certain percentage of their credit to priority sectorssuch as agriculture, small and medium scale enterprises, export credits, etc. The priority sector norms target fixed in case of foreign banks (branch of foreign bank) is 32% of the net bank credit. This is lower than the targets fixed for domestic banks which are 40% of net bank credit.

This regulation is a bit tough for the foreign bank because they lack the local experience to gauge the customer’s local needs. However the banks fulfill their obligation by lending to SMEs who need the services of foreign banks. SMEs in India have taken a leap forward. They form an attractive market with lots of potential to cross-sell varieties of products once they are hooked to the bank.

Strategy to sustain profitable growth amidst these regulations: Restriction on “brick and mortar” branches opens an avenue to click and network branches. It is the online presence that matters and not the physical presence. Online presence provides synergy to the positioning of the branch as a tech savvy service provider. The need for capital propels a bank to use its savings bank account deposits to meet the requirements. One major reason why the foreign banks have high minimum balance is because their customer base is small. They play in margin not in volumes.

Conclusion:

The key differentiator between Deutsche bank and the others were that the oterds wanted to be everything for everyone whereas deutsche bank wanted to be something for everyone and be the best in that product offering. It did not compete with the local banks in their segments, it focused on its core offerings. To run in a marathon you need expertise, perseverance and endurance. It is foolish to run a marathon like a sprinter. If you do so, you will be out of the race very soon. The long term view of the bank and its courage to face short term losses ensured victory in the long run.

Annexure I

1. The Recent recognition for the retail vertical of the bank.

2. Recognition for the efficient risk management of the bank.