Deutsche Bank Debt Unit Feels Pinch Amid Review: Markets

Deutsche Bank AG is learning just how hard it is to stay committed to its fixed-income business in a new world for investment banking.

After using some of the 8.5 billion euros ($9.4 billion) it raised in a share sale last year to bolster its fixed-income business, its credit unit has been shrinking. Frank Argilagos, its head of high-grade debt sales in New York, exited last month and Joshua Wilkes, co-head of investment-grade trading, departed in January amid restructurings. Jim Kenny, who took over as sole head of the team, entertained an offer this week to join a bond-trading platform before the bank wooed him to stay, said three people with knowledge of the talks.

The exits are adding to a sense of uncertainty among traders and sales staff already facing compensation cuts as the Frankfurt-based lender responds to regulations that are making the trading business costlier. The bank is completing a months-long strategic review to determine where it needs to trim operations to boost returns while deploying more resources to profitable ones. Deutsche Bank already cut credit sales teams in San Francisco and Chicago and retreated from some of its credit derivatives business.

“Managers are never going to admit their empire isn’t as valuable as it once was,” Erin Davis, an analyst at Morningstar Inc. in Chicago, said in a telephone interview. “With global regulations changing, and more capital required, being big has costs associated with it that outweigh some of the advantages.”

Not Alone

Renee Calabro, a spokeswoman for Deutsche Bank in New York, declined to comment on personnel matters. Colin Fan, co-head of the investment bank, said in a December interview that the company was “finding areas that don’t make market or economic sense and redeploying resources to areas and clients which need us most.”

Deutsche Bank isn’t alone in scaling back operations that had been among the most lucrative businesses before souring mortgage debt spurred the worst financial crisis since the Great Depression. Since then, the 27-country Basel Committee for Banking Supervision increased capital withholding standards for banks to make them less susceptible to failure.

Shrinking Commissions

The rules made it more expensive for banks to hold riskier assets, once an essential part of corporate-debt trading teams that used the inventory to profit from buying and selling bonds. In response, primary dealers authorized to trade with the Federal Reserve cut credit holdings 76 percent from the peak in 2007 through March 2013, when the Fed changed the way it reported the data.

At the same time, unprecedented stimulus by central banks worldwide suppressed yields on everything from government debt to junk bonds, shrinking the amount traders pocket from each transaction.

Royal Bank of Scotland Group Plc may eliminate as many as 14,000 jobs as part of a plan to shrink its securities unit and refocus toward the U.K. consumer market. That could include more than 1,000 jobs cuts at its U.S. trading division as part of a global overhaul, Chief Financial Officer Ewen Stevenson said last week.

Barclays Plc is also reviewing its investment-banking operation as it plans to shrink the group’s assets.

Pressure Intensifies

This isn’t comforting for the traders who are still at these firms. More than half, or 51 percent, of staff members at European banks were thinking about taking another job, according to preliminary results of a survey this year by New York-based recruitment firm Options Group. That compares with 42 percent expressing the same desire at hedge funds with more than $5 billion of assets.

Deutsche Bank has made some hires to its New York debt team in the past year, including high-yield traders Brandon Logigian from Goldman Sachs Group Inc. in September and Mark Doria from Citigroup Inc. in January. It brought Kenny over from Credit Suisse Group AG in 2013 to run the investment-grade credit team with Wilkes.

As pressure from regulators intensified, though, it started scaling back in places it no longer considered profitable.

It stopped trading credit-default swaps tied to individual companies, Michele Allison, a spokeswoman for the bank, said in November. Deutsche Bank had been among the most dominant players in that market during its heyday before the crisis.

Sales Cuts

The bank’s decision to cut its credit sales teams in Chicago and San Francisco led to at least six people being let go, two people with knowledge of the decision said in January.

In the latest wave of departures from Deutsche Bank’s securities unit in New York, at least four credit salesmen and traders have left.

Argilagos, 48, had been with the bank for more than a decade before exiting in February, according to two people with knowledge of the matter, who asked not to be identified because they’re not authorized to speak publicly.

Greg Froehlich, a high yield credit salesman, also left within the past few weeks, the people said. Patrick Kennedy, a high-yield trader at the bank, joined investment firm H/2 Capital Partners and investment-grade credit trader Michael Gorun exited to join upstart trading platform TruMid Financial.

Staying ‘Committed’

That’s where Kenny, 45, was headed this week before agreeing to stay at the bank after negotiations with his managers, according to the people with knowledge of the discussions, who asked not to be identified because it wasn’t announced.

The debt-unit departures also included Rich Rizzo, who ran trading of collateralized loan obligations, two people with knowledge of that move said in January.

Deutsche Bank’s share sale last year was its biggest capital increase since 2010 as the lender sought to reaffirm its commitment to a full-fledged investment bank and to build its equity reserves.

Even as it scales back, Deutsche Bank “can remain a top-five competitor,” co-Chief Executive Officer Anshu Jain said in a January conference call with reporters. “There will be some modest reshaping of our fixed-income business,” while the company will continue to invest in other areas, he said.

Indeed, financial services consultant Greenwich Associates named the bank as the top fixed-income firm globally last year. Deutsche Bank was the fourth-most active manager of corporate-bond sales globally in 2014, behind JPMorgan Chase & Co. and Citigroup, according to data compiled by Bloomberg.

‘More Painful’

Jain is working with co-CEO Juergen Fitschen to refresh their plan for the lender to lift returns and reverse a stock drop that was the most among the biggest banks last year.

Banks will be under pressure to cut costs for several years to come as low interest rates and a drop in trading revenue eat into earnings, Fitschen said in a speech in Frankfurt on Thursday.

“Being a global universal bank doesn’t necessarily mean doing everything for all clients, he said. ‘‘That’s not our definition.”

As long as banks keep cutting, though, the uncertainty that can drive sales and trading teams to seek other opportunities will persist, said Morningstar’s Davis.

“It’s more painful for companies when they cut back in a dribbling way,” Davis said. “Right now, you are just waiting for the next shoe to drop.”

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