Deutsche Bank considering cuts to US cash equities business

Frankfurt

DEUTSCHE Bank AG is considering extensive cuts to its cash equities business in the U.S. as part of a wider restructuring of its investment bank, according to people familiar with the matter.

Such a step would lower costs and pull the German bank out of a market where it has lost competitiveness, but it would also leave new chief executive officer Christian Sewing to look for new ways to generate income.

A decision could come as early as this week and may be communicated as part of a larger package of changes to the German lender's securities unit, said the people, asking not to be identified because the details are confidential. No final decision has been made and the supervisory board will discuss the issue on Wednesday ahead of the scheduled publication of the financial results for the first quarter the following day, according to the people.

A spokeswoman for Frankfurt-based Deutsche Bank declined to comment.

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. A retreat from that business in the US, where Deutsche Bank has struggled to compete with the large Wall Street firms, would mark a strategic shift under Mr Sewing, who took over from John Cryan earlier this month.

"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."

Deutsche Bank ranked between seventh and ninth among investment banks in revenue from the cash equities business, according to data compiled by Coalition Development Ltd. Global revenue from that business across 12 of the largest firms dropped to a total of US$9.2 billion in 2017, the lowest since at least 2006, the data show.

In a first memo to staff, Mr Sewing had taken a tough line on the bank's stubbornly-high costs and said 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 as volume remained "challenged" last year, without providing figures.

"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.

Mr 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", examines 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.

Deutsche Bank's global equities unit has been particularly weak in recent years. Revenue has fallen for 10 straight quarters, and the bank recently hired a former Goldman Sachs executive, Peter Selman, to restore growth. The unit's US arm cost five dollars for every four dollars of revenue it brought in last year, according to a report from JPMorgan Chase & Co analysts led by Kian Abouhossein.

The cash equities business has suffered from a transition to automated trading and passive investing, both of which have cut the need for human input into day-to-day equities trading.

What business remains has structurally "moved away from banks", Mr Cryan said on his last quarterly earnings call with analysts in February. Mr Cryan had said at the time that the bank should take that into consideration when making decisions on where to cut and where to invest. BLOOMBERG