Deutsche's avowed strategy in fixed income currency and commodity (FICC) sales and trading has been to hang on in there until rivals pull out. Sure enough, Credit Suisse is now pulling back from rates trading. For Deutsche, however, Credit Suisse's retrenchment has come too late.
Revenues in the German bank's FICC business fell a monumental 48% year-on-year in the third quarter. This was far worse than the 37% decline at Credit Suisse, worse than the 44% decline at Goldman Sachs, and worse than the 43% decline at Morgan Stanley. In fact, Deutsche's fixed income results are the worst of the lot so far.
For a bank with a big fixed income business, which it's trying to keep intact whilst riding out the rough times, this doesn't look great.
Why did Deutsche do so badly? The bank pointed to 'lower client activity and a more difficult trading environment reflected in a lack of liquidity' in rates and credit trading, to margin compression in FX trading, and to weak client demand in residential mortgage-backed securities.
Earlier this year, Deutsche's own banking analysts predicted a 40% reduction in rates revenues across the industry in 2013. However, Deutsche is one of the market leaders in rates trading and was expected to suffer less than smaller rivals. Suddenly, that doesn't seem the case.
If you don't want to be working in FICC at Deutsche, you do want to be working in FICC at Nomura. While all other banks' fixed income sales and trading revenues have plummeted, Nomura's have risen significantly. In the most recent quarter (Nomura's second quarter), fixed income sales and trading revenues rose 7% year-on-year. The bank attributed this to 'strong performance in rates and FX'. This seems strangely at odds with the rest of the market.
As we've noted before, Nomura's markets business is run by ex-RBS superstar trader Steve Ashley. Ashley appears to be working miracles at the Japanese bank.
Most banks have been cutting pay per head for their investment bankers this year. This isn't the case at UBS. The Swiss bank has suffered this morning as a result of new higher capital requirements relating to litigation risk, but its investment bankers are doing fine.
For the nine months to the end of September, UBS accrued a total of CHF263k in pay per head for its investment bankers, up from CHF234k last year.
UBS has been increasing pay, Credit Suisse has been decreasing it. Accrued pay per head in the investment bank of UBS is CHF263k. At Credit Suisse's investment bank, it's CHF204k.
It was around this time last year that UBS announced its 'strategic acceleration from a position of strength', involving 10,000 redundancies - mostly in the investment bank.
Since then, it's cut investment banking headcount by 2,414 people. That's a lot of cuts still to come.
Are risks limits killing Deutsche's FICC business (see point 1)? As the chart below (taken from Deutsche's presentation) shows, the German bank has consistently cut its Value at Risk (VaR) over the past year. At the same time, Deutsche's rates traders have less balance sheet to use. Deutsche CEO Anshu Jain said to today that 70% of the €250bn reductions Deutsche intends to make to its balance sheet by 2015 will come from the rates franchise. Being a rates trader at Deutsche is no fun any more.
It's looking increasing like Deutsche will have to make some redundancies in its beloved fixed income sales and trading business. Costs absorbed 86% of revenues across Deutsche's investment bank in the third quarter, up from 72% in the third quarter of 2012. Worse: return on equity in Deutsche's corporate and investment bank was a mere 5% in the third quarter. Jain said today that this was unacceptable and the bank wasn't satisfied with its performance.
Deutsche has already made redundancies in its investment banking business. Over the past year, it's let go of 2,457 people in total, of whom 562 people were front office bankers.
While Deutsche's return on equity languished at 5% in the third quarter, UBS achieved an impressive 17% return on attributed investment banking equity (annualized). The bank proudly pointed out that this is already above the 15% it was aiming for.
A stupendous return on equity isn't enough for UBS, however. The Swiss bank also highlighted its risk-adjusted-revenue performance, measured as 'revenues per unit of VaR'. This was up 6% quarter-on-quarter.
Deutsche and UBS are both making redundancies (see points 5 and 6), but the redundancies they're making are very different.
In the past year, only 22% of the redundancies at Deutsche's corporate banking and securities business involved front office staff. At UBS, 54% of redundancies over the past 12 months affected front office staff. UBS is cutting expensive bankers. Deutsche isn't.
The Japanese bank said today that it's 'achieved most of its wholesale $1bn cost reduction target.'
See the chart below, taken from Nomura's presentation. VaR is down. This makes the bank's sales and trading performance all the more impressive.