On Monday Deutsche Bank released its plan to shrink itself down to a manageable, profitable size, and from Wall Street’s perspective, it’s a long time in coming.
Deutsche Bank announced plans to reduce leverage by €200 billion and streamline other operations on Monday. It’s part of a broader trend of banks slimming themselves down in order to comply with regulations that aim to prevent another ‘too big to fail’ institution from harming the global economy.
Deutsche Bank co-CEO Anshu Jain, who gave an interview with Bloomberg TV’s Hans Nichols Monday morning, said that this new iteration of Deutsche Bank would emphasise equities markets and corporate finance while taking on a more transactional than advisory role on deal making. The bank’s fixed income business would shrink as well.
Wall Streeter’s who’ve spoken with Business Insider about the restructuring say that the shift speaks to serious issues that have been building at the bank in the last 12 years or so. Before becoming co-CEO in 2011, Jain was head of the investment bank starting in 2004. There, he turned fixed-income trading into a global powerhouse.
“He grew revenue. No one asked how,” said one former Deutsche Bank employee who spoke on the condition of anonymity. “Everyone knew the type of risks that were being taken in the good old days.”
When Jain took the head of the bank, fixed-income made up 80% of the bank’s global sales and trading revenue. It’s no surprise, then, that up until December Jain was reaffirming the bank’s commitment to its fixed income business despite the fact that it’s become incredibly challenging due to the market’s global low interest rate environment.
“The issue is that the guy [Jain] who created all this damage is now running the bank,” said another former employee.
Beyond fixed-income, the bank is also moving away from investment banking operations like deal making. According to data from Dealogic, Deutsche Bank — after years of capturing a double-digit percentage of global M&A — is down to just eight per cent of M&A market share.
However — as was the case last week with Credit Suisse, which installed a new CEO in Tidjane Thiam — investors have not reacted well to European banks’ pledge to become more profitable by doing less.
Deutsche Bank stock fell for more than five per cent after the bank’s plan was announced, and last week, Credit Suisse shares lost value after it revealed its plans.
“Across the board, I can’t think of a single European bank that isn’t going to have to raise capital,” one Wall Street analyst said. Banks in Europe are facing tougher restrictions through their central banks, compared to US firms, especially when it comes to the amount of capital they’re required to hold.
Jain said, however, that those requirements wouldn’t be a problem for Deutsche Bank going forward.
As for the move away from things like retail banking, one analyst said that translates into potential revenue growth on this side of the pond. Deutsche — and other big banks — getting out of the retail space “creates an opportunity for make share gains among US banks.”
So at least there’s a bright spot for someone.