Crisis breeds opportunity

By Marie Shields, Editor

Wolfgang Driese has always been a man with a plan, as I discover over the course of our discussion, held in DVB’s headquarters, on the top floor of a skyscraper in Frankfurt.

Ten years ago, DVB was a bank at breaking point. From its historic origins as the financial institution of the German railways, DVB abandoned almost all railway-related banking, instead covering general corporate banking. When DZ (then DG) Bank acquired a majority share in 1995, DVB’s portfolio was considerably different to how it looks today: unsecured corporate loans, foreign exchange offices all over Germany. It was treading water in an increasingly competitive marketplace, and by 1996, it was time to sink or swim. DZ approached Driese, who was working at Deutsche Bank.

“At that time I was not in the market for a new job at all,” he smiles, leaning forward in his chair and looking out of the 40th floor window over the city below. “Then when I looked at DVB, it seemed like there was no point in me going there at all, as I couldn’t see a way that the bank could survive! Its business model was not sustainable. I actually told them to close the bank. Looking at the figures, it was obvious. So why should you take on a job, take on leadership somewhere that is not profitable?”

Why indeed? After working for the likes of Citi and Deutsche Bank, what possible attraction could a failing small German bank offer? Driese had always dreamed of having his own bank (he tells me jokingly that his own bank account was “a couple of million short”), so he looked more closely at DVB to see if there was any kind of attraction for him. It turned out that the dead-end itself was the bank’s salvation. “This impossible task of turning something around, when it has no chance of surviving as it is. That was what attracted me.”

DVB had a transaction business, but as any small financial institution knows, it’s easy work for any big bank to kick you into touch on price every time. For a while DVB was the market leader in notes and coins trading, but as Driese points out, how much money can you make on that? The bank also had a small corporate banking business but all exclusively in Germany, with no operations abroad. As it was, there was no way the bank could survive. When he took over in 1997, DVB had an operating profit of around three and a half million euros; a negligible amount, when you consider it could be wiped out from just one bad loan.

About turn

The change in direction – which, by banking standards, was drastic – was inspired from the simplest thing: the bank’s name. “Deutsche VerkehrsBank means German Transportation Bank, but we were covering no transport at all! That’s where the idea came from. When I looked, there was no-one else in the market covering this niche of international transport asset finance exclusively. In this sense, the bank had no competition. So the only way for us to survive as a small institution was with a strong sense of focus.” This focus came down to concentrating on one industry, offering a limited (specialised) product range, and also limiting the number of customers that are courted (quality, not quantity).

Of course, a change like this can’t happen overnight. The bank tried to optimise what it had, and hold off taking on new business until old business could be closed down. Driese describes it as a painful exercise, but one that could only end in success for him on a personal level: he had no other choice. He had to survive. It took a long time for DVB to shift to its new paradigm, because everything had to change. Bit by bit, old business was closed down or sold off, and transport finance acquisitions began to fill the portfolio. “The bank had to be so disciplined,” he confides. “Whenever we added something, we closed something. It was a long process, but it worked better that way. If we had done it all at the same time, it would have been disastrous.”

DVB’s 19 domestic branches were all closed down (with the exception of Hamburg). The bank’s staff was reduced from over 1000 to 312 (current staff level is 500), and new offices were opened around the globe. The staff that remained with the bank had to learn English (the international language of transport), and management had to learn about global labour laws for instance. “We had to start with a strategy, decide exactly what we wanted to be,” Driese explains, “and we needed the right people.”

He realised the bank needed to become global as it was unlikely it could survive confined within the overbanked German market, and it also needed to catch up with an integrated IT structure. This IT platform proved more problematic than anyone anticipated; in 2000, DVB became the first bank in Germany to adapt all the features of SAP, which “nearly killed us!” Driese jokes, the pain of the ordeal out-lasting its integration.

Today

Today’s challenges take a different form. DVB isn’t mindful of the competition, nor is it being directly affected by the current financial markets crisis (thanks to the availability of liquidity from parent DZ Bank); but like most institutions, it is feeling the pinch, even if only through its clients. “A slowdown in certain European countries will affect the demand for transportation,” says Driese.

“But if you have a recession and you are producing something, you try to source more from cheaper markets. You outsource more, which means more transportation. You try to enter new markets because you want to sell. You have to travel to meet new customers. You try to introduce products to new markets. More travel and more transportation. There may be less business people travelling first class or business class, but they must still travel. There might be less consumer demand in the US and certain European countries, but how many Asians have flown to date? Very few, and that’s likely to change. I think we have still a positive market.”

Given the current state of the market, I wonder whether increased competition is something DVB is watching closely. Driese grins and shrugs. “It may sound a bit arrogant that we don’t watch the competition – we just try to be ahead of everything, determining our own speed and direction,” he says. “I said earlier when DVB entered the market it had – due to its unique business model – no competition, and to some degree I believe it still doesn’t. The faster the bank has to change and adjust to market needs, the less it is concerned with others copying the business model.”

“There are of course bigger institutions doing aviation or vessel finance, but if you look at the size of their commitment to the industry compared to the overall size of the bank it’s a mere fraction. If only three percent of your total balance sheet looks at transport, how quickly are you changing your focus? How closely are you following industry trends? As a smaller institution, your specialist focus and immediate availability is what attracts customers. We have to be available to offer complex solutions at any given time in a cycle, up or down.”

Lessons in HR

 In order to stay on top of the market and offer the right solution at the right time, DVB conducts extensive research in all three segments of its business: land transportation, shipping and aviation. This is quite an investment. Analyses are made on the types of assets financed by the bank; fluctuating variables like stock market valuations are ignored. Taking aircraft as an example, research is done on the market for a certain aircraft, how many have been ordered, how many are stored in the desert, broadness of the user base, the kind of engine choices available, number of airlines using the plane, whether there is a concentration risk, what are the next stages of technology for this kind of craft, and so on. It’s a complex and constantly changing marketplace, one that calls for deep expertise in the transport industry.

This probably explains the make-up of DVB’s staff. Look closely, and you won’t see a legion of investment bankers desperately cramming Lloyds List or Aviation Week. Instead, you find transport scientists, shipping experts, aviation brokers. Wolfgang Driese freely admits that, prior to DVB, he had never financed an aircraft or a vessel. As he had to learn a lot, attracting talent that already possessed the knowledge was paramount. “My feeling is that it’s much easier to train an experienced person from industry – that has worked for a ship owner or for an airline – and teach them our few banking products, instead of trying to teach someone who knows banking products about the transport industry.”

“So we added lots of people who had never worked in a bank before because of that; our concept is driven on expertise. Having the deepest expertise in the market available is a secret of success. You have so many things to think about – for example, if some of these low-cost airlines were to go bankrupt, would there suddenly be a glut of a certain kind of plane on the market, looking for a new home, bringing down the second hand price? The analysis must be so thorough. I am just the man who is responsible for communication, risk, and all of our strategy; I’ve learned a lot over the years but our expertise comes from those who study the industry for a living. When we meet our customer he knows he is talking to a bank that knows his industry, through all the cycles – up and downs – a bank that can compare his business model with the business model of competitors, and can give advice.”

The nationality of DVB’s staff has also transformed from an all-German outfit to something that resembles the Bayern Munich squad, with its heavy reliance on a blend of foreign imports. “When Germany plays football I know where my heart is,” Driese jokes, “but for the bank, I’m proud that we are an international institution, because our business is international. Our customers and our solutions are global. Today only about 33 percent of our employees are German. This adds an interesting dimension, the dimension of culture. Time and time again we have to examine how we can best accommodate people who have certain dreams and expectations.” A man well aware of cultural stereotypes, he also raises the point that DVB has a board made up of a German, a Frenchman and a Norwegian, unique for a financial services institution. “And who ever would have thought you could have a Frenchman and a German on the board of a German bank!” he laughs.

Technical knowledge

Staying ahead of the competition and on top of the market sometimes means acquiring expertise from other places. Over a year ago, DVB acquired the British Aerospace Asset Management team; again, people who have never worked at a bank, Driese points out. The service they provide is leasing, selling, buying and reprocessing aircraft. “This is not just for DVB,” Driese tells me. “We rent this service to third parties; banks, investment houses, private equity, hedge funds that have acquired aircraft but are inexperienced in getting their hands on the aircraft, or extracting the plane from a certain customer or country, or how to re-employ the asset.

Moving a step further, DVB also acquired UK-based company, TES Aviation Group, an engineering firm in Cardiff that focuses on aircraft engine purchasing, leasing, and part-out. Maintenance of the engine has the highest priority until the very last flight, even if the pilot flies the aircraft into the desert, (at the beginning of an aircraft’s life, the engine represents 20-30% of its value, while at the end of the lifecycle, that same engine represents 90% of the value). As the engine is maintained throughout the life of the aircraft there are many parts that can be reused, and this is a market that is growing. “TES is an interesting and profitable business in itself, but DVB’s main interest was because of the expertise we would gain, as TES knows what to do with assets towards the end of the lifecycle. They bring us closer to the metal – that is why we acquired them. And on top of this, we now have the world’s first bankers with dirty fingers!” Driese remarks with his characteristic humour.

The shipping news

Despite the amount the aviation industry has been in the global media – carbon emissions, the countless airlines that have gone bankrupt since 9/11 – today it is shipping that makes up the bulk of DVB’s portfolio. Two years ago, DVB started to establish and acquire teams for particular niche markets within shipping. The first was cruise vessels. Another was floating production, storage and offloading vessels (huge vessels that can process and store oil), and a third was container boxes.

“One of the teams we acquired concentrated on nothing other than financing and providing equity solutions for container boxes. With this kind of experience we quickly realised there is a competitive advantage if you have a dedicated team in each specific sector in shipping. Other people may claim to be shipping experts, while covering 10 or even 20 segments. Our experts concentrate on individual sectors - and this on a global basis.” As Driese points out, how can you compare a cruise vessel with a container vessel, or a drilling rig with a tanker?

Crisis breeds opportunity

While the financial services market might be struggling at the moment, Driese and those involved in transport have already lived through a large downturn, after 9/11. “Having experienced what happened through 9/11 and other cycles in aviation and shipping we have the experience, we know how to weather the storm. It is in times like these that we can use the strengths of DVB to the fullest. As the competition falls away to concentrate on more important parts of their portfolios, DVB can really make use of its expertise, of its research and marketing experience on the aircraft or vessels.”

The most dangerous part of a downturn in a cycle is the first part. In Driese’s own words, most companies are still euphoric over the successes they enjoyed while business was booming, and so take less care to ensure they have adjusted things like advance rates while the cycle moves down. “The transition into a down-turn has to be cautious, and well managed. It helps that we have been through it before.” Of course, having a robust business model also helps, but Driese is quick to point out that DVB’s business plan is not a quick fix for any other financial institution. “Our model fits DVB and wouldn’t just fit anyone else. Everyone has to find their own solution. The issue that I see is to stick to what you can do best, and not try to be jack-of-all-trades, master of none.”

Maintaining a sustainable cost base is also an important factor. When he started at DVB, the bank had a cost income rate relation of more than 90%. Today it has below 50%. “People also get greedy,” he says, shaking his head. “Under today’s interest rate levels, DVB’s current business model can generate a consistent return of around 20%. I’m not saying we can expand this business model to generate 25%, and if we have 25% we’ll go 28%, and then 30%. If you do this, you are changing your risk profile. You have to understand the return you can generate out of an existing successful business model, and not try to squeeze more out of it every year. You have to be very clear what you can achieve. If you try to over achieve, then you make mistakes.” From a man who has managed a turn-around so pronounced in six years, the message is clear: fast and steady wins the race.