Deutsche Bank AG co-Chief Executive Officer John Cryan is overhauling the fixed-income division his predecessor built as he seeks to boost profit and capital.
Michael Ormaechea, a senior executive for the division in Asia, will lead an executive committee overseeing the business, according to an internal memo obtained by Bloomberg. The unit’s products and services are being divided into six main groups, with leaders for three of them reporting to Colin Fan, co-head of corporate banking and securities, the memo showed.
Cryan, 54, who replaced co-CEO Anshu Jain last month, has signaled he will shrink the investment bank amid more than 11 billion euros ($12 billion) of misconduct costs. Germany’s largest bank is under pressure to overhaul its securities unit to respond to stricter capital rules and a slump in debt trading that eroded some of the most profitable businesses.
“This used to be the big earnings generator, but the time has come to slim down and focus on areas that are sustainably profitable,” Michael Seufert, a Hanover, Germany-based analyst at Norddeutsche Landesbank, with a hold rating on the shares. “They were waiting for a revival, but that just hasn’t happened and Cryan may be able to make cuts where his predecessor couldn’t because he was so attached to the business.”
The shares rose 0.4 percent to 28.91 euros at 3:23 p.m. in Frankfurt. They are up about 16 percent this year.
The nine largest investment banks including Deutsche Bank saw their combined revenue from trading fixed income, currencies and commodities fall 7 percent to $68.4 billion last year, a second annual decline, data compiled by Bloomberg show.
Under the new management structure, Ahmet Arinc will continue to lead foreign exchange, while Tom Hartnett and Sam Wisnia keep their roles leading rates trading, according to the memo. Tom Humphrey, who heads the investment bank unit in North America, will serve as interim head of flow credit and distressed products. All four, as well as Ormaechea, will report to Fan.
Joe Randazzo, who is based in New York, will lead global liquidity management, and Michelle Neal, a former Nomura Holdings Inc. banker, will oversee listed derivatives and clearing as well as fixed-income market structure. David Lynne, who was head of the rates business in Asia, is leading the fixed income and currencies division in the Asia-Pacific region, according to the memo.
“This new governance structure will ensure clear accountability within each product, allow greater efficiency and operational excellence across products,” Fan wrote in the memo, which was sent to staff last week.
Under Jain, who rose through the ranks of Deutsche Bank’s investment bank after joining in 1995, the lender increased average equity at the securities unit by 37 percent to 32.5 billion euros in the second quarter from a year earlier to win market share as competitors retrenched from debt trading.
While Deutsche Bank’s debt trading business rebounded, it has yet to regain its pre-financial crisis levels. The business generated 4.75 billion euros of revenue in the first half, down from 5.57 billion euros in the first six months of 2012 and 6.24 billion euros in the same period of 2007, its filings show.
Cryan, who succeeded Jain, 52, at the beginning of July, has since called costs “unacceptably high,” with a “continuing burden of heavy litigation charges.”
At the time, he inherited a two-month-old plan by Jain and co-CEO Juergen Fitschen to boost returns by lowering adjusted expenses by about 15 percent by 2020 and shrinking the investment bank by as much as 17 percent through 2018.
“The new management team is likely to accelerate the delivery and broaden the scope of this strategy,” Standard & Poor’s analysts led by Richard Barnes in London wrote in a report on Tuesday. “Deutsche Bank faces an extended restructuring period and requires strong strategic execution to achieve its objectives.”
The fixed income division’s executive committee will focus on areas including strategy, costs, personnel, conduct and controls, according to the memo. The six product groups also will have their own panels tracking risks, revenue and financial resources.
Richard Herman, Deutsche Bank’s global head of fixed-income trading, told employees in May he was leaving after 20 years at the company to pursue interests outside of finance. The announcement came a month after Deutsche Bank disclosed plans to reduce the size of the investment bank.
Changes to Deutsche Bank’s debt trading business also reflect “the issue of getting a real handle on compliance in the trading business and avoiding a repeat of the regulatory fines which have hit the bank,” said Seufert.
Since the start of 2008, Deutsche Bank has racked up more than 11 billion euros of costs, including reserves, to pay fines and settle lawsuits over the misconduct of its staff, mainly at the investment bank, company and court filings show.
The firm has yet to resolve investigations into its role in attempts to manipulate foreign exchange markets as well as a probe of whether it broke U.S. laws on processing payments for countries subject to trade sanctions. It also faces lawsuits which allege the company didn’t make adequate disclosure of U.S. mortgage-backed securities. The bank has said it is cooperating with regulators in these matters.