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Deutsche Bank says UBS’s fixed income plan is incomprehensible and unworkable. Is it?

Deutsche Bank knows a thing or two about fixed income. As one of the leading fixed income banks with a 9% market share according to Bernstein, it has a pretty good idea what works and what doesn’t. And according to Deutsche, UBS’s new fixed income strategy doesn’t work.

UBS’s plan to exit the fixed income business sales and trading business and to ostensibly make two thirds of its staff redundant, is ‘difficult to understand,’ says Deutsche. The Swiss bank has chosen to continue operating markets such as FX, precious metals, flow rates and credit, but these are all very competitive. Of a total 3,000 fixed income sales and trading staff, Deutsche estimates that UBS is ditching 2,000 and keeping 1,000 to work in these areas, but are 1,000 people really enough to keep these competitive businesses running?

Deutsche’s biggest query, however, is over UBS’s unusual plan to pull back from fixed income sales and trading and yet to continue operating a debt capital markets (DCM) business issuing bonds for its clients. This simply isn’t “practical” says Deutsche, adding: “We think DCM clients expect some secondary trading capacity, which is why DCM market shares are dominated by commercial banks and not by boutiques.”

As a result, Deutsche is predicting a second stage of redundancies at UBS. Before the end of 2013, it says UBS will pull out of DCM and pull out of its remaining FICC businesses and that another 2,000 to 3,000 jobs will go this year. It’s not the only bank to think this: Dirk Becker, an analyst at Kepler Capital Markets, has predicted that UBS’s capital markets business will die a slow death and be ‘marginalized quarter by quarter.’

Should people be preemptively getting out of UBS’s remaining DCM and fixed income businesses before it’s too late? UBS declined to comment. However, one senior UBS DCM banker was adamant that the new plan was viable: ““If you are in the simple business of originating bond transactions for corporate and FICC clients here, not a lot has changed,” he insisted in November. UBS has also pointed out that it’s not pulling back from secondary fixed income trading entirely – it’s simply pulling back from market making and will maintain its ability to trade the the bonds it issues on behalf of clients.

UBS may be right. Since the restructuring of its fixed income business was announced in November, the bank points out that it’s worked on numerous large DCM transactions, including a $2.25bn 3 tranche benchmark bond for Microsoft and a $2bn 3 tranche bond for Aetna, the US healthcare firm. Its share price has also risen nearly 20% in a clear sign that shareholders approve of the strategy.

And if UBS fixed income bankers do want to find alternative employment? It may be tough. Deutsche’s analysts are predicting a difficult year for FICC in 2013. Revenues and headcount will keep falling, they predict, with headcount across global investment banks falling another 6-7% this year.

Deutsche FICC headcount

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