Deutsche Bank has reported. The first quarter of 2017 at the German bank wasn't that great, particularly when compared to U.S. banks which had a spectacular start in fixed income trading (Goldman Sachs excepted). So, if you're thinking of joining John (Cryan) and Marcus (Schenck), you might want to ask a few questions first. We'd suggest trying those in the list below.
Deutsche Bank doth protest too much.
Ever since clients deserted Deutsche last year due to intimations of a huge fine from the U.S. Department of Justice, there have been hopes they might come back again. Although Deutsche Bank would like to persuade everyone otherwise, there are signs that this isn't happening in some markets.
"Clients are returning following the turbulence late last year, and we see this in every business area," said CEO John Cryan in his message accompanying the results. Clients are "reengaging" says Deutsche's presentation. However, Deutsche also said that its equities revenues were weaker than expected due to, "a decline in Prime Finance revenues, which reflected higher funding costs and lower client balances." Implying that the hedge fund clients who deserted Deutsche last year have yet to come back again.
More promisingly, and as the chart below reflects, Deutsche does appear to have regained some share in its trading businesses since the fourth quarter of 2016 (Q416). As the chart below shows, revenues in Deutsche's fixed income and equities trading business grew at a faster rate than at both Goldman Sachs and J.P. Morgan when compared to the three months previous. So, maybe some clients are coming back to DB after all?
Who cares if hedge funds ditch Deutsche permanently? When Deutsche updated its strategy in March, it said it was moving away from these kinds of institutional clients and becoming a corporate client-focused business instead. Does hedge funds' desertion of DB matter therefore?
In the equities business, the answer seems to be yes. Although Deutsche's equities revenues grew strongly compared to the fourth quarter (see chart above), they were down 10% compared to the first quarter last year and poor performance in the hedge fund-focused prime brokerage business appears to have been to blame. Deutsche's stated strategy is to "selectively recapture prime client balances." So far, this doesn't seem to be happening.
Anyone who's seen the Thomson Reuters chart tracking Deutsche's global market share in M&A since 2007 (shown here under point seven) should want to ask this. Between 2013 and 2016, Deutsche went from sixth in the global M&A rankings to 10th. In the first quarter, it fell again and was outside the top 10 - Reuters didn't even bother to chart it.
As our chart below shows, Deutsche's first quarter M&A revenues fell far more than rival bank's when compared to the first quarter of 2016. Deutsche Bank has said it wants to deepen its M&A and ECM relationships this year, implying that it might hire some rainmakers. Maybe this needs to happen soon?
Deutsche Bank is alive with "professional services" consultants. In the past six months it's spent over €1bn on "professional services fees." Assuming these are all strategy consultants, what are they doing exactly?
Today's results suggest Deutsche is cutting headcount from the front office in its global markets division (232 people, net, went in the first quarter) whilst continuing to add people in support roles. The bank plans to make an additional 1,000 new hires in compliance and anti-financial crime by the end of this year, 370 of which were made in the first quarter.
When Deutsche announced its renewed strategy in March, questions were raised about its plan to cuts its way back to growth, however. As one ex-Credit Suisse MD points out, success in banking is now dependent upon maximizing profitability for the growing regulatory cost base - not cutting profit generators while the cost base is rising. Does Deutsche agree?
Unlike other banks, Deutsche has also said it won't be relaxing harsh bonus deferrals to gain control over compensation costs on a yearly basis. This looks like a mistake. Compensation costs rose at DB in the first quarter and the bank said previous years' deferrals were to blame.
Deutsche's strategy is also to do a lot more cross-selling. In March it pointed out that two thirds of its corporate clients had a relationship with only one part of the bank and said it wanted to increase cross selling to, "enhance profitability and returns with...chosen clients."
Deutsche is also shaking down its technology function. It currently has no fewer than 38 operating systems and it wants to get these down to four. At the same time, it plans to cut 6,000 of 30,000 technology contractors (2,700 have gone sine October 2015, and 2,000 have been brought in house). None of this seems to be reducing technology costs, though: Deutsche's tech spend was €936m in the first quarter of 2016 and €933m in the past three months.
Like Goldman Sachs, Deutsche Bank's fixed income traders struggled with low volatility in the first quarter, with revenues falling in the FX trading business as a result. The implication is that Deutsche's FX business should have done well from rising euro volatility in the approach to the first round of the French elections, and that they're struggling again now that volatility's fallen off again. What are the implications for Deutsche's fixed income revenues in the first half?
Lastly, Deutsche has big plans for its U.S. business in 2017. Cryan himself has taken control of the bank's U.S. business and Deutsche is reportedly offering junior bankers base salaries 20% to 30% higher than the rest of Wall Street as it tries to hire 16 managing directors and directors in the U.S. this year, plus accompanying analysts and associates. However, U.S. banks generally reported far better first quarter results than DB. Higher salaries aside, what does the German bank have to offer its U.S. recruits?
Photo credit: Blue petals / Blaue Blüten by Deutsche Bank is licensed under CC BY 2.0.