Two years later: Deutsche Bank’s rocky road to recovery

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Two years after a radical overhaul and a sudden reduction in its workforce, Deutsche Bank is changing its tone.

An increase in trading activity, combined with a pandemic-fueled trade boom, has prompted executives at the German lender to start thinking about expansion. They want to capitalize on the strong recent performance – the investment banking unit accounted for 43% of overall revenue in the first three months of the year and has been profitable every quarter since the start of 2020. For to do this, the bank hires senior negotiators. and seeks to take market share from its rivals on the trading floor.

It’s a about-face of almost two years ago when Deutsche threw the ax, cutting 18,000 jobs altogether, giving up trading in stocks and reducing risk-weighted assets by 40%.

“We have become a lean organization over the past few years and we don’t have enough people to handle all the client business we receive,” said Henrik Johnsson, co-head of Deutsche’s investment banking in Europe. , in the Middle East and Co-head of Africa and the world of capital markets. “We are succeeding, but we are absolutely looking to grow. “

The bank has recruited around 30 senior executives in the investment banking, sales and commerce and research sectors during this year in Europe and the United States, and expects new hires in sectors key activities after a rebound in performance.

In 2020, Deutsche Bank posted its first annual profit in six years, registering 113 million euros, against a loss of 5.7 billion euros in 2019. Its investment bank, fueled by its strong bond business, has was the main driver of the turnaround. , its pre-tax profit jumped by more than 500% to € 3.2 billion.

Covid-19 has bolstered banks’ trading desks, resulting in increased revenues as the crisis spurred market volatility. Investment banking fees have also skyrocketed. Trade rally is now showing signs of decline, Wall Street bosses including Jamie Dimon of JPMorgan and James Gorman of Morgan Stanley speak this month of more normalized earnings in Q2 2021, particularly in fixed income .

However, Panos Stergiou, head of the institutional client group for Emea and global head of macro sales at Deutsche Bank, said he had gained stakes over rivals.

“A significant proportion of FIC’s revenue gains are not just related to market activity, but due to the strategic changes we initiated in 2019,” he said. “We have rebuilt our flow credit activity in Europe and the United States, our fixed income units and emerging markets. We have gained market share and these are areas that we will continue to develop. “

Mergers and acquisitions, UK equity capital markets and investment banking are currently areas of growth, Johnsson said, while Stergiou said the bank sees opportunities in “the flow credit business. European and American, CEEMEA [central and eastern Europe, the Middle East and Africa], European macro trade and sales and US rates ”.

Recent hires include Daniel Ross of Barclays as Head of Investment Banking UK and Ireland and Stéphane Gruffat, a 20-year veteran of Credit Suisse who joined as Co-Head of the European ECM.

In markets, Vishal J Bhayani has also been appointed to head a new high-performance European office with four other hires.

Managing Director Christian Sewing spoke up for Deutsche’s strategy at its annual general meeting in May. Recent improvements have not marked a return to “the old ways of Deutsche Bank,” he said. Sewing added that all of the base units “have significantly increased their profits.”

“We never said we would pull out of investment banking – we just focused on our strengths,” he said.

Sewing’s four-year overhaul, unveiled in 2019, gave more power to the merchant bank and less to the trading function, but it quickly adapted to new market opportunities and has since raised its targets. income from investment banks as market conditions improved.

However, it is understandable that he seeks to distance himself from any perception of a new reliance on investment banking. Deutsche’s investment bank has been a point of contention for successive CEOs, with a string of scandals and missteps costing the bank $ 19.4 billion in fines since the 2008 financial crisis and frustrating investors. investors.

In 2018, former boss John Cryan was ousted for not overhauling the unit quickly enough. Sewing’s radical new strategy was to turn the company around and leave its long-standing problems behind.

“To a degree, boring is the new sexy,” Johnsson said. “We have worked hard over the past three years to make investment banking a more sustainable business. Part of this cuts costs, but we’re also focusing on key areas of strength, which translate into revenue. “

Deutsche loses its reputation as the sick man of Europe after years of cuts and underperformance. Sewing said in May that it was 85% of the way to transformation and had gained market share in its investment bank “without deploying additional capital or staff.”

Executives seem determined to make the bank’s image problems a thing of the past. Its investment bank was built through a series of interventions, culminating in the payment of $ 10.1 billion to Bankers Trust in 1998, which transformed it from a largely stable domestic lender into an international player. suddenly putting himself at the feet of his Wall Street rivals.

Kevin Rodgers joined the group through the acquisition of Bankers Trust in 1999 and became Deutsche’s Global Head of Foreign Exchange during a 15-year career there. He said the bank had become very compartmentalized and had the “feeling of warring city-states in Renaissance Italy”.

“In part, the silo mentality was caused by the speed at which the investment bank was built,” he said. “There would have been no arguments over which system to use if the bank had been planned more deliberately. The way the different silos were built around debauchery teams from different banks is also significant.

“The customers were arguing; products too, ”he added. “It was all encouraged – or, at the very least, not discouraged – from above the bank. He ate huge amounts of emotional and mental energy.

Couture has worked hard to combat these internal feuds, insiders say, with morale and performance improving over the past two years.

About 20% of the frontline staff at the investment bank was cut in 2019, its head of fixed income, Ram Nayak, said in a presentation to investors that year, while rivals have circled unstable senior talent as a result of the changes.

Johnsson and Stergiou both said it was now easier to attract senior traders and traders to the bank.

“In the second half of last year and this year, the Deutsche Bank brand was rebuilt,” Stergiou said. “It’s clear to me when I talk to people in the C suite about clients or competitors that we are now considered one of the top five counterparties to the FIC. “

“Bankers see what’s going on in the market and can say that most of our tough decisions are behind us,” Johnsson added. “There is a chance to join a team where everything is not yet built, and so it is an opportunity for ambitious people.”

In some ways, the performance of Deutsche’s investment bank is timely. Credit Suisse is reeling from the collapse of family office Archegos Capital and supply chain finance firm Greensill Capital, while other European players still lack scale.

In a 174-page report released in June by analysts at JPMorgan, Deutsche was ranked as one of the three “last-tier” investment banks in Europe along with Barclays and BNP Paribas, as Wall Street rivals took market shares in the sector. At its annual general meeting, Sewing said that Europe needs stronger investment banks: “We shouldn’t just import this kind of expertise.

Deutsche is now the only European bank to be among the top five players in the bond market, according to analysts and executives at JPMorgan. JPMorgan analysts said Deutsche was a “story of a turnaround under its current leadership”, but that it had to “defend its stocks against its better-placed US peers.”

The German lender was the dominant force in European investment banking for years before being ousted from first place by JPMorgan in 2016. It still has some way to go before rekindling those glory days, which are now in the limelight. eighth in the Emea fee rankings, with $ 464 million, according to data provider Dealogic.

But despite the recent rally and the hiring, Johnsson has played down his ambitions for the top spot, saying he will continue to focus on his strengths. He pointed to a recent merger between the trading room and the investment bank that led it to rank among the top four bookkeepers for sovereign, supranational and agency bonds globally, according to Dealogic, as well. that gains in ECM aided by the soaring blank check companies this year.

His recent wave of hires is taking even longer than he would like, but that’s no longer due to the problems the bank is facing, he said.

“It’s a tough market because recruiting in investment banking is now very hot,” Johnson said. “I’m probably spending at least 20% of my time hiring right now, and a lot of people have competing offers or get fired. “

To contact the author of this story with comments or news, email Paul Clarke



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