The division has struggled with management changes, a lack of volatility in markets and fears over Deutsche Bank’s stability that prompted some clients to go elsewhere in 2016
By Steven Arons & Donal Griffin / BLOOMBERG
Peter Selman, hired out of retirement by Deutsche Bank AG to turn around Wall Street’s worst-hit equities business, wants to tap universities rather than rivals to do so.
“We certainly have holes to fill and we’re hiring,” Selman, an ex-Goldman Sachs Group Inc partner who joined the German lender in November, said in a phone interview. “But we’re going to focus a lot on graduate recruiting. I don’t think the path forward is one where we make a lot of very high-priced, expensive lateral hires.”
Selman, 45, will need all the help he can get as he seeks to revive a stocks unit where revenue has fallen for 10 quarters in a row, leaving it 39% smaller than it was two years ago.
The division has struggled with management changes, a lack of volatility in markets and fears over Deutsche Bank’s stability that prompted some clients to go elsewhere in 2016. New European rules that effectively force banks to charge for research separately from broking services aren’t helping.
Concerns about the scale of the challenge, which mirrors that at the overall investment bank and is complicated by renewed scrutiny of Deutsche Bank’s expenses, are reflected in a share price performance that’s dead last among European banks in the past year. Yet, Selman is optimistic that this year will mark the turning point.
“I am focused on growing revenue and prudently managing expenses to improve profitability,” Selman said. “I think 2018 will be a lot better than 2017.”
Selman oversees a division that deals in stocks and equity derivatives, and a prime brokerage unit that services hedge fund clients. Revenue from equities trading was €2.1 billion (RM10.25 billion) in 2017, about 8% of Deutsche Bank’s total.
Along with hiring graduates, Selman said he will invest in Deutsche Bank’s technology to help recover what’s been lost, he said. The lender needs a “best-in-class electronic platform”, which will be a long-term investment focus, he said. It already has good products for derivatives clients, he said.
“Peter is saying that they’re not going to buy their way out of this, because they can’t,” said Oliver Rolfe at Spartan International, a London- based recruiter that focuses on equities trading. “The only way to do it is to be like an Ajax or a Tottenham Hotspur. Invest in youth, get them involved in the mentality and direction of the firm, and in seven to 10 years’ time you’ll have a fully fledged business.”
CEO John Cryan, 57, had largely exempted the equities business from the downsizing that hit fixed-income trading when he took control at the Frankfurt-based lender in mid-2015. He promoted the then-head of the business, Garth Ritchie, to run the overall markets division and said he wanted to invest in cash equities and the prime brokerage. Yet, stock-trading revenue has fallen year-on-year in every quarter since, including a 25% tumble to €332 million in the final months of last year.
Deutsche Bank’s equities performance in the two years through 2017 is the worst among large global investment banks to so far report fullyear earnings, according to Bloomberg calculations.
Societe Generale SA and Goldman Sachs, where Selman was co-head of equities until 2016, suffered declines of about 16%. Credit Suisse Group AG may report a plunge of about 38% this week, according to an estimate from HSBC Holdings plc analyst Alevizos Alevizakos.
The equity unit’s performance “is another crack in the wall”, said Michael Huenseler, who helps oversee €22 billion, including Deutsche Bank shares, at Assenagon Asset Management in Munich. “Cryan has failed to revive the business as promised.”
There are plenty of reasons for the decline. Looming large over the performance is the period in late 2016 when fears over Deutsche Bank’s ability to pay its legal bills prompted hedge fund clients to yank funds out of the prime brokerage.
A series of senior departures since 2015, meanwhile, unsettled the division, a person familiar with the matter said. Trading chief Andre Crawford-Brunt, global sales co-heads Jonny Potter and Derek Capanna, and prime co-head Murray Roos have left. Rob Ebert, who led the business in Asia Pacific, was convicted in 2016 of dangerous driving causing death after a fatal collision in Hong Kong.
In cash equities — the trading of regular stocks for clients — investors are doing more business with non-bank intermediaries, Cryan told analysts and reporters on Feb 2 after the firm reported earnings. Deutsche Bank’s trading business was also singled out in a report last year as being most at risk from Europe’s sweeping MiFID II rules, which came into effect last month.
“The markets are changing,” said Cryan, who two years earlier insisted this was a business where Deutsche Bank needed to be. “If you look at simple products such as cash equities — secondary trading of cash equities — a lot of the volume, the growth volume, has moved away from banks in total.”
With stock trading in a structural shift, investment bank co-head Marcus Schenck on Feb 2 highlighted the need to improve the equityderivatives unit, which deals in more complex products that derive their values from underlying securities. The business, which executives have repeatedly blamed for slumps since 2015, reported “significantly lower” revenue in the fourth quarter (4Q) driven by “trading underperformance”, a presentation shows.
Schenck cited the hiring of Selman — a former co-head of equity derivatives at Goldman Sachs — as part of the firm’s efforts to improve that business. Deutsche Bank also last year hired David Silber and Mark Chen from Citigroup Inc as co-heads of the division for the Americas.
Like the rest of the investment bank, the equityderivatives business suffered from a lack of volatility in markets last year. Some clients had also pulled back from trading the products with Deutsche Bank in 2016 because of those same fears about the bank’s stability, a person familiar with the matter said.
And while the costly legal disputes that triggered those fears have since been settled, shares in Deutsche Bank last week fell to levels last seen in that period, after the firm’s 4Q earnings disappointed investors.
Selman is betting that, with litigation out of the way and fresh capital raised last year, Deutsche Bank will be able to win back “profitable wallet share” in 2018.
“The start of the year has been solid. We’ve seen a pickup in volatility which has been better for our clients,” he said.
Prized hedge fund clients who withdrew funds from the prime brokerage unit in 2016 are now back, he said, with balances “back at and above the 2016 high”.
“People really want to have a focused European investment bank as their counterparty,” said Selman. “We’re increasingly that bank of choice.”