Following are excerpts from an exclusive interview with CNBC's Geoff Cutmore and John Cryan, CEO, Deutsche Bank at the World Economic Forum 2017.
GC: So let me start off just by asking you about the nature of the settlement. Why did you get to 7.2 billion. Why was that acceptable to the bank and why did you go for an agreement rather than continuing to fight on like Barclays.?
JC: Well we had always intended to settlethe case. The settlement you're referring to was the Phraya DoJ element of abroader range of settlements that we've entered into in relation to mortgagebacked securities and in the context of having settled already with the FederalHome Loans authorities we had an intent to settle. We then had the unfortunateleak of the opening settlement proposal from the Justice Department and thatcaused as we'd admitted considerable concern mainly in-house with our peoplebut of course it was not comforting to our clients and our counterparts andbasically all of our stakeholders. So we were very, very keen to settle but ithad to be on terms that were broadly acceptable to us. In the end we agreed asettlement amount that has two main components, there's 3.1 billion dollars ofupfront cash payment which is charged to the accounts. That's a cash payment ofassets out of the house. There's then a commitment to deliver 4.1 billiondollars worth of value in the terms of redress to consumers in the USA and inthe round we felt that the bank was better to settle and put this matter behindus. We regret what happened. It was quite a long time ago but we just felt thatremoving the uncertainty from the bank allowed us to focus on moving forward.
GC: The starting bid was 14 billion which of course caused all sorts ofsurprise and shock in the markets. Do you regret that that strategy was used totry to bully you into a settlement close to that number?
JC: Well I wouldn't want to comment on howit leaked. Actually I don't know how it leaked. It was very unfortunate that itdid because as we rebutted immediately the leak was made public and then we hadto confirm it under German securities law. We did say that we had no intentionto settle at that sort of amount. But that that did lead to that period ofinstability that, that we certainly wouldn't want to go through again. So thatwas not how we would ideally like these negotiations to proceed. Much better ifthey're done behind closed doors and then we announce the settlement whenwe've achieved it.
GC: Given that the settlement that was agreed is half of that initialnumber, can you characterise the way that you got to that figure for us. I meanwas there a sort of mano to mano, eyeball to eyeball moment with the DoJ wherethey ultimately blinked and backed down?
JC: Well I'm not sure they'd thank me verymuch for going into too much detail about the toing and froing but clearly wehad our eye on a low number and they wanted more. They shared with us whatthey'd found in terms of facts and we read that and ultimately I think only last night they published their findings and we've acknowledged thempublicly. So it was in the context of the findings but also our desire to putthis behind us so there's a degree to which there is a price to pay just toresolve these matters because the uncertainty isn't good for the business orfor our people within the business
GC: Do you think you've now drawn a line under significant litigationcosts against the bank. I mean today, even as we sit down to record thisthere's a fresh story breaking that an FDIC claim that was shelved and pushedaside may now be reprised. No numbers involved but again it raises someconcerns in investors' minds so to what extent do you think you may now havedealt with the greater risk from litigation from the financial crisis?
JC: Well unfortunately I can't say that wehave dealt with all of it yet. That mortgages case I think was hopefullywas our biggest. We expected it always. I mean we even said publicly that wethought that that would be the most expensive for us to settle. We do stillhave, we have to publish the details of some of the outstanding matters so westill do have some work to do to settle legacy issues but what we really wantto do is get ourselves into a position where the company doesn't generally needto worry too much about our legacy problems and most of us can look forward andstart developing the bank again.
GC: Can you just confirm for us the realfacts around what is happening with bonuses and how they may relate at all tothe settlement that's been made?
JC: Well there's no direct relation atall.
GC: So this wasn't anything the DoJ sought in terms of your behaviorpost the settlement of the fine
JC: No. Not at all. Not at all. No, wefeel and this was a tough decision .I had a call with all of the MDs in thecompany today and we explained it was a tough decision. It was taken by theBoard in the end we rallied round it. You have to run a company such asDeutsche Bank with a longer term perspective than just one year and we want tobuild the company again on the basis of a very strong foundation. And wethought the right thing to do in a year in which we've contracted to make lotsof people redundant which we regret but it was in the company's best interests.We're not paying shareholders' a dividend. I think the shares ended lower thanthey started. They did rally a lot towards the end but nevertheless we didn'treally deliver a great deal of immediate value in the year. On the other handour people worked tremendously hard in the year. It was often harder to workfor Deutsche Bank than for some of our competitors. We're having a little bitof an off cycle downturn and it was tough for our people and they've workedpotentially proportionately harder during the year. It's difficult not toreflect that in some variable compensation.
But we did think that for the main and itis the main component of variable compensation we shouldn't pay anythingto our senior most people in here. There is a group component which in accordswith its own Terms will payout and we're trying to preserve thecompensation packages for most of our junior people. That's three quarters orso of the company so it's really our more senior leaders who will be impactedby this. We understand the risks. We took those into account and there will bea longer term incentive package for people who are crucial to the ongoingoperation of the company. So it's people in the front office but also veryimportant people in control functions and support functions whose roles arecritical to the success of the bank.
GC: And the retention issue is clearly front and center here. You wantto hold on to those who generate profit for the bank. How confident are youthat people are not going to drift away or be poached by the American banks forexample who are looking for those very same rainmakers?
JC: Well we always operate in acompetitive market for talent and we know that we take some risks. What we wantto do and what we've tried to do today and what frankly the management team hasbeen trying to do for the better part of the past 18 months is show the longterm prospects for the company. So we want to continue to try to message to ourpeople what the purpose of Deutsche Bank is, why we turn up to work every dayand how incredibly successful this company can be once we put behind us thesechallenging legacy items and start to rebuild to replace Deutsche Bank backwhere it once was at the heart of Germany and one of Europe's and the world'smost important international banks and capital markets companies.
GC: As part of that I think it's important to send a message to themarket and to your employees about capital levels. So can we just address thatfor a moment here. Will you need to raise any further capital over the nextsort of one to three years as a result of the litigation. And can I ask yousort of in connection with that whether you'll be disposing of any additionalbusinesses to fill capital holes?
JC: Well you raise a good point. We'vealways said that our strong preference was not to raise fresh capital whenthere were lots of other things we intended to do anyway. We've been shrinkingour perimeter a little bit. We've been reducing the numbers of products that weoffer in particular markets. We've actually exited some markets not too many.We have disposed of a lot of businesses in the past 12/18 months. Many of themwere in our non-core business. I think it's we haven't produced our results yetfor the fourth quarter but I think it's an open secret that we successfullyachieved our target of running down the non-core book we had a specialoperating segment and we got that to below the 10 billion risk weighted assetmark comfortably in December. And so we've actually we've wound that up andit's in the process of the remaining assets going back to their seedingdivisions. So we've reduced the risk a lot. There were two principaluncertainties. One was we're still not sure about prudential regulation. Wethought we might have a little bit more certainty today. But a critical meetingat the beginning of January has been postponed I think now we hear maybe March.Don't know yet. So there's still some critical uncertainty for us on some ofthe Basel rules on capital requirements. And as you mentioned it's not justlitigation and the regulatory matters but it's generally our legacy positionswhich we've done a tremendous amount of work. We've achieved a lot of progressbut there's still some uncertainty relating to that.
On the disposals we did dispose of a lotof businesses many in the non-core business. Many were not financial servicesbusinesses but we sold for example our stake in the Chinese bank successfully.We're very pleased with that one. We sold our life insurance company in the UK.We announced that it closed between Christmas and New Year. We do have a numberof other smaller businesses that we intend to offer for sale over the next 12months or so. None of them I think merits pre-announcement but we just want toget on and do them. They're a part of this tidying up. This sort of footprintreduction but it's actually making the place a little simpler and a little morefocused.
GC So just very clearly no capital hike at this point. Nointention to do that?
JC Well I've been in this role andthe CFO role before so I know never to say never. It remains to be seen whatthose uncertainties hold for us. And then we will once we've assessedparticularly our capital position from a regulatory perspective, once weassessed that we will always consider how we best manage the company'sresources.
GC: There was a fantastic rumour doing the rounds back when we were inthe white heat of the moment and I think we saw you in Washington that therewere discussions with the German government about potential state bail outs andso on and so forth. Did you ever meet with any German politician to talk aboutthe government getting involved in the bank?
JC: I never discussed a state bailout.There may have been discussions but they weren't with the bank so far as I'maware. No.
GC: So we can shoot that rumordead?
GC: Never any talk about a government bailout or involvement in thebank.
JC: No not with me not with the board. No.
GC: At least that's very clear I think. So let's move on here. Can wetalk a bit about the business model going forward and the business environment.
GC: What will the bank look like in 18/24 months time. Will you be outof the U.S. securitisation business. Will you be out of the securitizedmortgage business in the U.S.. Will you be out of the securitized auto loanbusiness in Europe. I mean what what's the core going to look like compared towhere it is now?
JC: I'm not sure the footprint will changea great deal. We continue to simplify some of our markets products many of themanyway are no longer fashionable or work actually in the new regulatoryenvironment. So we do expect the balance sheet to continue to shrink somewhatin the markets business. A lot of the balance sheet positions and the riskpositions which are shrinking happen to be in the U.S. but it's not a USfocused strategy, it just happens to be that that's where we wrote a lot ofthat business. The core is really to continue to be this company anchored inGermany with the universal bank there which is focused on internationalmarkets. That's where when we're at our best. Our core, the reason we werefounded is international banking. We've extended that from beyond Germanborders. We serve Western European, we actually serve American companies verywell in the international banking markets. As you know we've largely withdrawnfrom Latin America as an on the ground presence. And we're not really inAfrica, so it's that arc from the USA through Western Europe all the way to theFar East. So that's the core geography and we keep our core internationalbanking businesses which are quite traditional. They don't change very much.We're digitalizing them as they merit that. And then in the securities businesswe complement our banking with capital markets international capital marketsactivity that's still very much centered on New York and London. And you can'tbe credible in international capital markets if you're not relatively wellrepresented there, with some certain centers in Asia.
Germany clearly for us is also importantso Frankfurt will remain important in capital markets. We must simplify thebusiness but we don't want to disengage from it. Ultimately we want to growDeutsche Bank so that it can serve the communities in which we operate. So notmuch difference. I shouldn't forget because I always get told I forget thisone, asset management remains absolutely core. It's a separate fiduciarybusiness. Now the regulations make it a little bit more separate but it's asuper business. It's very sizable. People forget how big it is and it's a verylovely steady stream of predictable profits and revenues for us so we like itvery much so we'll keep that.
GC: And before we wrap up I wanted toaddress a couple of political stories that obviously are going to have abearing on how the world looks over the next 24 months. And one is DonaldTrump. There will be those who will ask: Should you have settled with the DOJnow? Shouldn't you have waited for Donald Trump to come into office, push backDodd-Frank , push back the DOJ on all this tough regulation of banks and thepunitive approach that it's pursued for the misdemeanours pre 2007 2008?
JC: Well I think I would give a very clearview on that one which is my view and I know it's shared by our board. This wasa civil dispute with the Justice Department over facts that we've acknowledgedand I am not sure the presidency or the office of the president was actuallyeven relevant to it. This was a civil dispute and our genuine belief was thatit was in the better interest of the bank to settle and put it behind us. So ofcourse people asked that question. But for us I think on the basis of a civil disputeyou settle it if you can and we did.
GC: And does Donald Trump bring strongergrowth with the banking system do you think? I mean is it a good thing ifDodd-Frank is pushed back?
JC: Well, I'll answer the first partfirst. I think the market certainly expects there to be a refresh and somestimulus coming into the U.S. market and you've seen asset prices continue togo up I think. I spent the first week of the year there and I spoke to a numberof industrialists but I also had anevening with some CEOs of the major investing institutions and there'sdefinitely an air of optimism about the short to medium term prospects forgovernment sponsored stimulus. So I think there is an air of positivism therewhich frankly I don't really see as pervasive in Europe. So I think the U.S.will see that tailwind. And for that reason that's good for us because we havea sizeable American business. Europe clearly still has a few challenges. Ithink we benefit hugely from Germany being that bastion of strength within theEurozone and frankly Europe. And long may that remain the case. I think webenefit in Europe from the better growth prospects that Germany has shown andcontinues to show. And I think we can benefit a little bit from that tailwindin the U.S.
GC: And Theresa May has given us someguidelines as to how the Brexit negotiations are going to go. Tougher than somethought, I think, given that she's made it pretty clear what the policy isaround the single market access story and also on immigration crossing theborders. How do you feel about where Brexit now goes and what the implicationsare for your business?
JC: Well for us Brexit is another elementof uncertainty to some extent for the entire industry, not just for us, and tosome extent there was a little bit more clarity or a little bit more certaintyperhaps of the inevitability of the Brexit and to some extent it would be betterfor us to know what the terms are than have continuing uncertainties. So whatwe would like to know is where the respective parties are likely to come out inrelation to the issues that matter to us both directly but also indirectly.We've a reasonably sizeable British business. I don't just mean the Londonbooking center and the London market but we have a business in the UK too. Andso that's also relevant to us. But I think there's no clarity yet on thetechnical rules on which quite frankly how we respond to a Brexit reallyhinges. We need much more flesh on the bones of how passporting will or willnot work, how licensing of our people will or will not work, vis a vis theremaining European Union in the UK or USA.
GC: Are you already making plans to takesignificant headcount out of London?
JC: No concrete plans because I think wewant to know with a little bit more clarity what the rules will be. Having saidthat, of course all companies should be making contingency plans so we do thinkabout it a bit. It's too glib to say well we're German so it's easy to moveback to Germany. It remains to be seen how London fares. But it really is the, or one of the two leading global financialcenters and not all of the business in London of course is European Unionrelated. London, when it competes with New York has the competitive advantageof being part of the EU. And that falls away a bit. So maybe, as I said, maybeNew York is partly a beneficiary because London's competitive advantage ofbeing part of the EU falls away but it remains to be seen where European Unionbusiness is done.
GC: Let me just wrap up by asking you amuch more human question. What a tough year 2016 was for you. 2015 was a toughyear. I mean I remember being in the headquarters as you were laying out thedetails of the plan that you had to transform the bank. And then of course justthings just got harder and harder as we ran into 2016 here. So let me ask you,now that you have a settlement, clearly you think there may be other issues onthe table still to come here but at least this particular issue now seems to bebeing put to bed. Does it feel like you you're a prisoner who's had the tagremoved. Because as I understand it you're pretty much at the beck and call ofthe DOJ when they're on your case I mean just tell us a little bit about howthings are for you?
JC; Well, to the extent I'm a prisoner Iput myself in jail because I did this voluntarily. I always knew there'd be anumber of challenges. I think it's fair to say I wasn't counting on there beinga Brexit or political uncertainty and then all the other things that have beenhappening as exogenous factors. I never counted on there being prettylong term and deep negative interest rates, that wasn't in the plan either.There have been a number of things that have challenged us but you never knowwhat life's going to deliver. The good thing is that you mentioned the DOJsettlement that was the biggest settlement that we entered into. But franklyduring the year we shouldn't underplay the tremendous work that's been done, alot of our legacy issues we were managing to tick one, that may have been smallones, but we ticked one off every month or, so periodically, we werescoring little wins in terms of putting things behind us. And I have to say I'mvery proud of the work that everyone in the bank did last year. We managed tomaintain the business. We managed to maintain momentum and I see people prettymotivated and mobilized to really work with our clients and build the bank again.So I'm now much more optimistic clearly than I was last year. There's less todo because you kindly mentioned that we've done some of that stuff but there isstill a lot of work to do. But I want people now really to start lookingforward. And the number of people who take care of tidying up the remaininglegacy matters shrinks as we move forward.
GC: And is it happening faster? I mean areyou pushing your guys faster now as a result of what's happened?
JC: Well I think the board thinks thesooner we get all of this behind us the better. But we are, we're prettypleased with the progress we've made. We're never complacent and there's stillthis uncertainty. I mean there's a lot of uncertainty coming this year, lots ofelections in Europe. So we have to take it as we come.