In a major strategy reversal, Deutsche Bank probably won't be completely exiting from its retail banking operations and probably will be making big cuts to its investment bank.
For Deutsche's 8,207 front office investment banking employees, this comes as an unwelcome surprise. Only a few days ago both the Financial Times and Bloomberg were reporting that the German bank was planning to eschew big cuts to its investment bank and to continue pursuing the Goldman Sachs-esque strategy of remaining a powerhouse in fixed income sales and trading while others fall by the wayside.
The revelation that Deutsche will also be paying a record $2.5bn fine to resolve its LIBOR failings may not be related to the shift in strategy. Nor may the fact that the bank accidentally destroyed 482 tapes of telephone calls related to the LIBOR investigation have anything to do with it. Even so, things suddenly look a bit ominous at DB - and especially if you work for the bank's fixed income currencies and commodities (FICC) business.
Until now, Deutsche's FICC professionals have been protected from redundancy: in 2014 headcount in the front office fell by only 2%. As the chart below from Morgan Stanley shows, Deutsche was the only top 3 player in FICC to maintain its market share in 2014. This is likely about to change.
Source: Morgan Stanley
Deutsche's new strategy isn't a done deal: It's due to be recommended to the bank's management board this Friday. If the board approves, these DB jobs are likely to be on the front line.
With at least 29 people at Deutsche responsible for evoking the $2.5bn LIBOR fine, it's likely that the bank's large rates trading business will suffer disproportionately in any cuts. According to Greenwich Associates, Deutsche Bank was the global market leader in rates trading last year, with a 10.5% market share. Revenues in the G10 rates business have collapsed in recent years. Coalition puts them at $17.1bn in 2014, down from $51.8bn in 2009.
If Deutsche pulls back from rates, it will come as good news to rivals. This year rates revenues will increase between 5% and 10%, according to Morgan Stanley.
With capital at a premium, the Financial Times predicts that Deutsche's repo traders will also be at the forefront of any cuts. In January, Morgan Stanley's analysts posited repo jobs as one of the worst places to be in investment banking this year. As banks pull back from repo in an attempt to hit leverage ratios, Morgan Stanley predicted a 10-15% fall in revenues across the market. Deutsche already cuts its repo book by 29% between 2012 and 2014. This could only be the start.
Credit also looks like a likely candidate for cuts. Deutsche's credit business is less strong than its rates business - the German bank ranked outside the top five banks globally in 2014 according to Greenwich Associates. Nonetheless, if you're Colin Fan and are casting about for people to cut, credit looks like a good bet. Credit traders everywhere struggled in the first quarter and revenues in the area will fall between 5% and 10% this year according to Morgan Stanley.
4. Equity derivatives
The Financial Times is also predicting that Deutsche will 'pare back' its equity derivatives business which has become expensive to run under new capital rules.
5. Prime brokerage
The exit of Christopher Dennis, a prime broker who spent eight years with Deutsche and left for a start-up last month may have been a sign. The FT reports that Deutsche is considering 'scaling back' its capital intensive prime broking activities too.
6. Marginal offices
Finally, Deutsche is said to be pulling out of marginal countries in the style of RBS and Barclays. Where might these marginal locations be? Central and Middle Eastern Europe looks like an obvious bet. Right now, Deutsche has operations in Ukraine, Russia and Hungary, for example.
If these jobs are at risk at Deutsche, which are safe?
Try anything in IBD. Much like Barclays, the Financial Times says Deutsche will be re-emphasizing its advisory businesses as it pulls back from capital intensive sales and trading.
This could be a plan. - Except that IBD hasn't traditionally been Deutsche's strong point: it was beaten to the top of fee league table in home territory by J.P. Morgan last year. Other banks (Barclays) are already pursuing a FICC-light advisory-heavy strategy. Deutsche's reversal makes the bank look guilty of me-tooism. It also comes just as FICC revenues are picking up again - which can only be good news for rivals who are committed to staying in the space indefinitely (Goldman Sachs.)