LONDON - Christian Sewing may be breathing an unnaturally long life into other banks’ stagnant equities businesses. The Deutsche Bank boss's decision to scale back the trading and selling of shares makes sense given the sector’s slim margins and stagnant revenue. But it will reduce the pressure on peers to follow suit.
Deutsche’s decision to completely exit its global equities trading business – around 7% of group revenue – is the most eye-catching part of a restructuring announced by Sewing on Sunday. The once prized business, built up by former investment banking boss Garth Ritchie, accounts for the majority of the 288 billion euros of assets now scheduled for runoff.
There’s a case for other banks to copy Sewing. Global revenue across equities, which totalled $45.9 billion last year, has barely grown since 2013, according to Coalition. The prevalence of electronic trading has cut the money banks make from buying and selling shares. They have responded by cutting staff, but high costs mean that the average operating margin in equities has still shrunk by three percentage points to 25% since 2014.
Deutsche isn’t the only bank with an arguably subscale equities business. Barclays, Credit Suisse, HSBC, BNP Paribas and Société Générale all fall outside the top six banks by global revenue share, according to Coalition. Size isn’t everything: SocGen, for example, has a niche derivatives business. But the pressure on profitability and increasing dominance of a few large players means other banks could justify cutting back, especially in Asia.
Still, bankers are reluctant to abandon a core product like equities. Even Sewing is hoping to keep a toe in the market, by continuing to underwrite and advise clients on new shares sales. But the fact that the German bank only had the eighth biggest market share in equity capital markets last year, according to Refinitiv data, suggests it will struggle to compete against top tier banks.
The bigger question is the damage to the remaining franchise. Investment banks have justified a ‘full service’ offering by arguing that unless you can buy and sell equities for big institutional asset managers, they will take their fixed income trading business elsewhere. The latter accounted for around a fifth of Deutsche’s revenue last year. Given the risks, Sewing’s peers will continue to trim, but probably eschew a radical restructuring. At least now they have one less rival to worry about.
- Deutsche Bank shares rose on July 8 as it launched one of the biggest overhauls of its investment bank since the financial crisis with plans to cut 18,000 jobs around the world.
- The lender announced the job losses on July 7 as part of a restructuring plan that will cost 7.4 billion euros ($8.3 billion) and undo years of work that had aimed to make its investment bank a major force on Wall Street.
- As part of the overhaul, the bank will scrap its global equities business and cut some operations in its fixed income unit, an area traditionally regarded as one of its strengths.
- Deutsche Bank gave no geographic breakdown for the job cuts, though the bulk are likely to fall in Europe and the United States.
- Deutsche Bank shares were up 3.7% by 0800 GMT on July 8.
(Editing by Neil Unmack, Bob Cervi and Karen Kwok)
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