Slowdown not systemic, need to correct asset prices: Deutsche Bank's Joshi

'We hold around €240 billion of liquidity reserves out of a net balance sheet of about a trillion', said Joshi

The current slowdown is cyclical and global investors are looking at long-term prospects for India, which may explain why the stock indices are at a high, says Dixit Joshi, group treasurer of Deutsche Bank AG. In an interview with Anup Roy, Joshi says the bank is putting more equity into its Indian operation despite a global restructuring as its business in the country is doing good. Edited Excerpt:

The US yield curve recently inverted, but has normalised now. Do you fear a recession coming?

It’s less about the prospect for economics in the next year or two; geopolitics is more likely to have a bigger impact. Economic conditions in the US are quite robust. We don’t see a major storm cloud on the horizon, but we have big risks in terms of geopolitics, whether it’s a satisfactory resolution to the US-China dispute, or getting Brexit done. When they get resolved, a lot of uncertainty will be taken out of the market which has been holding back trade and investment.

Do you see dollar dominance reducing going forward?

The dollar has been dominant in so many areas for so long. I’m not sure we’d see a large reduction in that. And as you have a greater degree of capital markets union and banking union across Europe over the next many years, there’s a high chance that the Euro becomes a greater proportion of portfolios than what it is now.

Deutsche Bank is engaged in restructuring globally. There is a liquidity concern about the bank…

We hold around €240 billion of liquidity reserves out of a net balance sheet of about a trillion. Just a comparison: In 2007 out of €2-trillion balance sheet we had a reserve of €65 billion. Our CET (core equity) one ratio was around 8.6 per cent, which is now at 13.4 per cent. We have a very, very different balance sheet and business mix now. And so to answer your question, I think the restructurings have convinced us that we are on the right track.

How does the restructuring affect your Indian operation?

India is very much a bright spot for us in our portfolio. India is not only growing, but it’s also a high RoE (return on equity) business for us. So last year, the profits of our Indian operations grew by over 30 per cent. It’s a good team, it is a good story, we have 17 branches and it’s a profitable business. We injected about €500 million of fresh capital into our India business in the beginning of 2019. The total capital now is just under €2 billion in India, but we felt confident enough to add another €500 million, given the way we see the business growing in India over the next few years.

RBI is trying to bring offshore derivative trades to onshore. Do you think it is feasible?

There will always be subjectivity in it. Offshore gives you more flexibility for derivatives. There will always be an element of diversification in investor portfolios. And it really does depend on the regulatory regime, the specific domicile of the client, and where the client would like his transactions processed. So often, the client will have one choice and to an extent, one does need to have the ability to allow clients some flexibility depending on their preference.

Is the overseas funding necessarily cheap for Indian companies?

The liquidity is available, but it’s available for those who are the strongest in the market. The markets are always going to be very discriminating and liquidity will only flow to the strongest issuers.

In India, growth is slowing, but stock indices are at record high. How do you explain that?

In India you see a bifurcated environment where you have the market at an all-time high, you have a number of stocks at all-time highs, including banks and some NBFCs, which are trading at multiples of book values. Some industrial companies are at an all-time high. 

And on the other end of the spectrum, you have companies that were growing quite fast, did not have enough longer-term liquidity in hand, were building businesses with smaller margins, and those margins are getting squeezed out.

So, the market is quite bifurcated. But what the market in aggregate is telling you is that even as you’ve had a slower GDP this year, the fundamentals are intact for multi-year periods of growth in India. This is very much a cyclical period where you’ve had rapid growth, especially in lending and out of the non-bank sector for a number of years. It’s a period of consolidation. I don’t see it as systemic. But, it does mean that in many cases, asset prices have to adjust. Assets have to move to holders who are better capitalised, more liquid and the right longer-term holders of those assets.

As an investor, which sectors in India look promising to you?

When you think about the consumer, you think about the last mile, about the transformation that’s taking place in logistics, you look at the automation of supply chains that are taking place across India. You look at the digital economy and the creation of new digital assets, together with the ability to monetise data in a way that didn’t exist before. All of those are quite big fundamental drivers of the economy and will remain so for a while.

The financial services sector is going to be a key beneficiary of many of the measures that have been put in place. GST, digitisation after demonetisation, the payments initiatives in India, biometric and unique identity … all of those have laid the foundation for a dynamic, efficient, tech driven ecosystem.