Sewing may announce details as part of a wider restructuring of its investment bank when he reports earnings tomorrow
FRANKFURT • Barely two weeks into the job, Deutsche Bank AG’s CEO Christian Sewing is considering a retreat that could mark the end of the bank’s two-decade quest to compete with Wall Street.
Sewing is weighing extensive cuts to the lender’s cash equities business in the US and may announce details as part of a wider restructuring of its investment bank when he reports earnings tomorrow, people familiar with the matter told Bloomberg. They asked not to be identified because the details are confidential.
Such a move, if it happens, would effectively signal a sharper focus on the lower-risk business of private and commercial banking in its European home market. Under Sewing’s predecessors, Deutsche Bank built the investment bank into Europe’s largest with ambitions to compete head-to-head with US firms. John Cryan, who started to reverse that push over the past few years, was ousted this month for being to slow to execute a new strategy.
The bank’s supervisory board will discuss the future of the investment bank today. No final decision has been made, according to the people.
Deutsche Bank’s stock, the second-worst performer among European banks this year, rose 3% in response to the news to €12.03 by 12:15 in Frankfurt yesterday.
The possible cuts to US equities, where costs outrun revenue even after a bull market stretching back nearly a decade, would be a “first step in the right direction”, said Stefan Mueller, the head of Frankfurtbased finance boutique DGWA. He said the bank has proven it’s “unable to make money in this business no matter what the market circumstances”.
According to research by JPMorgan Chase & Co, the Americas equities business had revenue of some €600 million (RM3 billion) last year. Lead analyst Kian Abouhossein estimates that the unit spent five dollars for every four it earned.
In a first memo to staff, Sewing had taken a tough line on costs, saying the bank will pull back from areas where it’s “not sufficiently profitable”. The bank said in its annual report that cash equities revenue was little changed from 2016, without providing figures.
Cash equities, or the trading of regular stocks, has traditionally been a core business of investment banks, but regulation and technology have made it less profitable in recent years.
“The retrenchment, if it happens, will be a double-edged sword,” said Markus Riesselmann, an analyst with Independent Research, who has a ‘Sell’ recommendation on the stock. “It’s probably too late for Deutsche Bank to regain its competitiveness in US cash equities and other areas of the investment bank. But the decision does raise the question whether Sewing will be able to achieve revenue growth.”
Doubts about future revenue generation are among the strongest arguments against cutting too aggressively. When Standard & Poor’s Ratings Group put Deutsche Bank’s issuer credit rating under review for a downgrade from Aearlier in April, it said that “we consider that a prolonged, deepened, or more costly restructuring would lead the bank to remain a negative outlier for an extended period”.
Dropping into the BBB rating bracket would make the bank’s extensive derivative business more expensive and leave it even more vulnerable to competition from the biggest — and more highly-rated — US banks.
“They’re pretty significant on the institutional side,” said Larry Tabb, founder of market research firm Tabb Group LLC. Still, intense competition among brokers means the bank’s clients will have plenty of other options, he said.
Sewing and Garth Ritchie, the head of the investment bank who built his career in cash equities, are currently reviewing all operations of the division, particularly the US operations, according to people familiar with the matter. The review, internally dubbed “Project Colombo”, is assessing each unit according to three or four criteria: How profitable it is, whether its products are critical for clients, how much regulatory capital it ties up, and how much investment it would need to be competitive in future. — Bloomberg