business

Deutsche Bank Cuts Wall Street Ambition to Focus on Europe

Updated on
  • Firm to reduce U.S. rates, plans to cut back global equities
  • Marks retreat from years of trying to compete with Wall Street
Deutsche Bank CFO James von Moltke discusses the bank’s plans for "re-scaling" U.S. operations.

Deutsche Bank AG is abandoning its ambitions to be a top global securities firm as it embarks on possibly the most sweeping overhaul yet of its struggling investment bank.

Germany’s largest lender will scale back U.S. rates sales and trading, reduce the corporate finance business in the U.S. and Asia, and review its global equities business with a view toward cutting it back, the bank said in a statement Thursday. The measures will lead to a “significant reduction” in the roughly 97,100-person workforce this year, it said.

Christian Sewing

Photographer: Alex Kraus/Bloomberg

The future of the investment bank had been a key factor in the tumultuous management shakeup that saw Christian Sewing take over as chief executive officer this month. A Deutsche Bank veteran who started as an apprentice, Sewing is accelerating a push to refocus the lender on its European home market and reverse a two-decade effort to compete head-to-head with the large Wall Street firms that dominate volatile securities trading.

“We have to act decisively and to adjust our strategy,” Sewing said in the statement. “There is no time to lose as the current returns for our shareholders are not acceptable.” He didn’t provide figures.

Shrinking Headcount

Deutsche Bank has cut about 4,000 jobs over the past couple of years

Source: Company filings

Note: Headcount measured in full-time equivalents; 2018 figure is for end of first quarter

Underscoring the issues at the investment bank, trading revenue in the first quarter dropped 17 percent from a year earlier, compared with a 12 percent increase at U.S. rivals. Deutsche Bank said that the drop was less bad if adjusted for a weaker dollar and several one-off effects. Barclays Plc, its biggest European peer, beat trading expectations for a second straight quarter, with revenue from markets rising 8 percent, the bank said Thursday.

Deutsche Bank fell as much as 4.2 percent before paring losses and trading 0.5 percent lower at 1:11 p.m. in Frankfurt. The stock is the third-worst performer among large European banks over the past five years.

The investment bank shift “appears to have some logic,” Andrew Coombs, an analyst at Citigroup Inc., wrote in a note to clients. “But we fear these steps could also have unintended consequences” for the rest of the business and “put even further pressure on both the capital position and earnings” in the short term.

The company didn’t provide numbers showing how deep the cuts to the investment bank will be. The lender had started to retreat from some businesses under Cryan, who said in 2015 that he would cut 10 percent of jobs, close operations in 10 countries and reduce the number of investment bank clients by about half.

Wall Street Ambitions

Deutsche Bank said on Thursday that it wants to focus its corporate finance business on industries that align with its European clients or areas where it has a leadership position. In U.S. rates sales and trading, it plans to shrink the balance sheet, leverage exposure and repo financing. In global equities, it wants to reduce leverage exposure to prime finance, focusing on the deepest relationships.

“We believe it is the right strategy especially taking into account the poor results,” Kian Abouhossein, an analyst at JPMorgan Chase & Co., said in a note to clients. “What the restructuring is missing is details for now.” Abouhossein previously urged Deutsche Bank to cut back its investment banking operations in the U.S., saying they’re not profitable enough.

Thursday’s announcement marks a retreat from decades during which Germany’s largest lender sought to take on the largest Wall Street banks. It joined the ranks of global securities firms with the 1989 purchase of British merchant bank Morgan Grenfell and a decade later purchased Bankers Trust, a New York derivatives house. That deal was a major step in the company’s transformation because it expanded access to the world’s biggest capital markets.

Paul Achleitner, now Deutsche Bank’s supervisory board chairman, advised it on the purchase while at Goldman Sachs Group Inc.

Yet the aggressive expansion eventually led to a spate of legal scandals that took Cryan a good part of his three-year tenure to clean up. Deutsche Bank has spent more than $17 billion paying fines and settling litigation since the start of 2008, according to company filings and other disclosures compiled by Bloomberg.

Management Shakeup

For the past months, Deutsche Bank had been reviewing the securities unit again to weed out unprofitable parts where it can no longer compete with its bigger U.S. rivals. With the review still ongoing, Achleitner was secretly seeking replacements for Cryan while the CEO fought to keep his job. His ouster this month also claimed another top executive, Marcus Schenck, a former deputy CEO who had been lobbying for a strong securities unit.

While shrinking the investment bank will make it harder for Sewing to return Deutsche Bank to growth, it could help him reach a target of 23 billion euros ($28 billion) in adjusted costs this year. Sewing has called the target “non-negotiable” in a memo to staff sent earlier in April.

Not a Far Fetch

CIB added 53% to Deutsche Bank's revenue last year, close to the CEO's new target of 50%

Source: Deutsche Bank annual report

Note: Revenue share excludes revenue from non-core operations

Deutsche Bank confirmed that target on Thursday. It increased its estimate for restructuring expenses to 800 million euros this year, up from an earlier estimate of 500 million euros, Chief Financial Officer James von Moltke said.

Deutsche Bank said today that it plans to focus its consumer bank on growing markets like Italy and Spain while in wealth management, the bank will look to grow in Germany and in international markets, Deutsche Bank said.

“Delivery is key from here,” said Guy de Blonay, a fund manager at Jupiter Asset Management. “The end of its global investment banking ambitions with cuts in the U.S. and Asia is welcome.”

Other highlights from Deutsche Bank’s earnings:

  • 1Q net revenue EU6.98 billion, down 5%; analyst estimate EU7.27 billion
  • 1Q sales and trading revenue EU2.45 billion, down 17%
  • 1Q net income attributable to shareholders EU120 million

— With assistance by Heather Burke, and Jan-Henrik Foerster

(Updates with investor comment in penultimate paragraph.)
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