Deutsche Bank is cutting pay for its salespeople and traders. It needs to. In the second quarter of 2016, compensation per head in its global markets business fell by 38% compared to a year earlier. Profits fell by 97% over the same period.
However you look at it, Deutsche Bank's trading business had a bad quarter. So did its investment banking business. Nothing was good.
Witness the revenue charts below. Deutsche Banks equities traders did exceptionally badly in the second quarter. So did Deutsche Bank's fixed income currencies and commodities (FICC) traders. So did Deutsche Bank's M&A bankers. Only its equity capital markets and debt capital markets bankers did marginally less badly than the rest of the pack, and neither business can be described as having done well.
Naturally, Deutsche had some excuses for the horror. In the call accompanying this morning's results Deutsche CEO John Cryan and CFO Marcus Schenck reeled off four mitigating factors which they said explained the abnormally bad quarter in the investment bank.
Deutsche's global markets business was hit by a goodwill impairment related to its asset management business of €285m in Q2. This contributed to the decline in profits. Without it, profits would still have declined, but by 71% instead of 97%. That's still not great: profits at Bank of America's global markets business rose 42% in the second quarter.
2016 was never going to be a good year for Deutsche. The German bank is midway through implementing John Cryan's Strategy 2020, outlined in October last year. Under this strategy it's pulling back from emerging markets trading and is cutting back on high yield and securitized debt trading. Although rates trading was up and FX trading was flat, credit trading therefore fell by around 25% and emerging markets debt trading fell by more. Schenck said these rebalancing actions alone accounted for a third of Deutsche's fixed income revenue reduction. Without them, Deutsche's FICC revenues would therefore have fallen by 13% - still a lot more than its rivals.
Deutsche is the first European bank to report. During the call, Schenck said Deutsche was disadvantaged by its orientation towards Europe where conditions were worse than in the US as "macro uncertainty around the EU referendum impacted client flows." This might be fair enough in equities, where trading activity declined 13% in Europe in the first half compared to a 3% increase in the Americas, but it holds up less well for fixed income, where most US banks lauded a volume-driven increase in revenues in the second quarter as Brexit unleashed a barrage of trades. Why didn't Deutsche benefit? - And in particular, why didn't Deutsche Bank experience an increase in FX revenues as appears to have been the case at J.P Morgan? Does this mark a further decline in the strength of Deutsche's FX business? The bad geographical mix accounted for another 30% of the decline in Deutsche's FICC revenues, said Schenck. If Deutsche hadn't been as oriented towards Europe and hadn't been implementing strategy 2020, FICC revenues would have declined a mere 7% (still a lot more than its nearest rival).
Deutsche was prudent in the second quarter, said Schenck and Cryan - it "took a particularly prudent approach going into the EU referendum." There was no attempt to quantify how this prudence contributed to the poor revenue performance, but it's worth asking whether Deutsche wasn't a little too prudent. A little less caution and a little more action might have made all the difference.
Where does this leave staff in Deutsche's investment bank? Facing the familiar evils of lower pay and fewer jobs appears to be the answer. Deutsche cut pay per head in its global markets business by 38% year-on-year in the second quarter, and trimmed front office headcount by 5%. As ever though, front office headcount cuts were more than offset by middle and back office headcount proliferation: overall staff numbers in Deutsche's global markets business rose by 6% in Q2 as the bank was compelled to add people in compliance and controls. In headcount terms, Deutsche is running to stand still.
Moreover, for all the talk about Deutsche rebalancing its investment bank away from fixed income, it hasn't got very far. Its equities and M&A businesses continue to perform miserably and in Q2 FICC generated 58% of revenues - putting Deutsche on a par with Bank of America and behind only Citi, which was most unbalanced in this regard with 63% of its revenues drawn from FICC in the last quarter.
There are, fortunately, two pieces of good news.
Firstly, Cryan didn't seem over-bothered by all that is Brexit. "When we operate in London, in the vast majority of cases, we operate out of Deutsche Bank AG itself," he said cryptically, The implication appears to be that Deutsche's London office already routes business through Germany: for regulatory purposes, business done in London is actually done in Frankfurt. For this reason, Deutsche is unlikely to need to relocate jobs for regulatory reasons, said Cryan: if jobs are moved, it will be because clients in Europe want the bank to be "facing them in the Eurozone."
Secondly, Cryan and Schenck seem to think 2016 might buck the usual trend and that revenues could pick up in the second half. Deutsche's bankers need to hope so: the bank as a whole made a profit of just €256m in the first six months, down 80% on the previous year. If this turns negative for the year as a whole, Deutsche's bankers will get their deferred bonuses clawed back - not only will this year's cash compensation fall, but access to previous year's bonuses will be removed. This is already causing cold sweats. "Forfeiture is 100% an issue," says one DB insider. "Last year, we were incredibly close to having a clawback and management only managed to avoid it by declaring an 'intangible goodwill writedown.' If there's a real loss this year due to a lack of revenue, Cryan will have a much harder time preventing BaFin and the ECB from demanding that he claws back bonuses."