According to “people familiar with the matter”, the Deutsche / Commerz merger is now reaching the stage where regulators start being asked for their approval. And it seems that the process of getting that approval – or more realistically, going back and forth with different potential merger models until one is found that the supervisor is prepared to sign off on – might not only be a drawn out and difficult affair, but might require big cuts to some of the trading businesses that Deutsche had always regarded as the crown jewels.
It’s a stressful process on both sides. The ECB is new to the business of banking supervision, and this would be the first really big deal it has had to look at. It’s also a deal involving one of Europe’s notorious problem children and one of the most systemically important banks in the world. The pressure to not approve anything which feels too risky is great indeed and the new head of supervision, Andrea Enria, has every incentive to be highly risk averse. That could be bad news for Deutsche’s sales & trading franchise.
The real issue is the structural problem underlying Deutsche's sales and trading business: it requires a very low cost of funding in order to make money. In the pre-crisis days with single-digit basis point spreads and unrestricted use of short term repo, Anshu Jain was able to build a “flow monster” taking tiny commissions and spreads on huge business volumes and then supplementing the profits by holding profitable but illiquid positions using the bank’s funding advantages. Since the crisis, those funding advantages have disappeared, leaving Deutsche struggling. Matt Zames has been doing his best to deal with the problem, but one thing that would really help would be to use a large proportion of the Commerzbank deposit base to fund the Deutsche Bank trading book. In a spreadsheet model, it would not be surprising at all if the RoI on that financing switch alone were very significant to the overall economics of the deal.
But … a new, nervous regulator looking over its first big merger approval, might be understandably reluctant to sign up to a plan to finance investment banking and illiquid speculation out of retail deposits. That’s the sort of strategy which, if it goes wrong, tends to go all the way wrong, and to do so in a very public way that’s almost bound to be blamed on the supervisor who let it go ahead. So, that supervisor is likely to be very cautious – not necessarily requiring total ring fencing of the traders from the retail deposits, but definitely asking a lot of questions about how reliant the merged group intends to be on securities business, whether the profitability turnaround plans are credible and in general doing everything it can to confirm that this is a proper business plan rather than a financing trick.
It’s no secret that there are a lot of people – shareholders as well as supervisors – that don’t believe in Deutsche as a global securities player and that don’t want to see it using any increase in capital and scale to try and reclaim past glories. This might be right or wrong from a strategic point of view, but it’s the current consensus. Unless it can overcome that consensus, Deutsche Bank's sales and trading business - and Deutsche Bank's sales and tradig jobs - are likely to have to shrink to a degree that will hurt....
Separately, back in Leadenhall Street at the financial market that time forgot, Lloyd’s of London has updated its code of conduct following news stories of “an almost permanent atmosphere of sexual harassment”. People who are visibly intoxicated will, starting Monday, be refused entry to the building. Lloyd’s will also be turning its onsite pub into a coffee bar, in another move aimed at reducing the overall level of drunken behaviour.
On-site bars and pubs used to be a feature of the Old City; many of the big houses used to subsidise them for staff, on the basis that it made it more likely you would be able to find someone if they were needed. But the Lloyd’s bar is one of the very last.
Under the new regime, the presumption seems to be that people who imbibe flat whites will be less prone to perpetrate harassment than those on pints. Still, it's hard not to wonder why the conversion from alcohol to caffeine didn't happen two years ago, when Lloyd's first forbade its employees from drinking between 9am and 5pm on weekdays?
Something has happened in the Barclays / Qatar fraud case, the source of so many delicious quotes over the last few months. The jury has been discharged by the judge, which usually indicates a collapse of the trial. But reporting restrictions (and very strict contempt of court provisions) are still in place, so it’s hard to tell exactly what’s gone on yet. (Financial News)
He supports Arsenal, he laughs at the gif files his son sends him, he doesn’t intend to retire – some personal trivia from Tidjane Thiam. He doesn’t give away his favourite Italian restaurant in Zurich though. (Bloomberg)
After harsh criticism from a number of quarters, Revolut have a new PR advisor and are going to take a less in-your-face approach, with the “Get sh*t done” slogan being retired from public use. (Financial News)
Great minds think alike – after Winton Capital reduced its exposure to trend following strategies earlier in the year, Rennaissance Technologies is doing the same – its “Institutional Diversified Alpha” fund will now mainly trade Tokyo and Hong Kong equities. (FT)
Changing guard … Rob Sweeney, Goldman Sachs global head of the consumer and retail group, will be stepping down at the end of April. He’ll be replaced by Stephan Felgoise, the current co-head of M&A in the Americas (Reuters)
Not quite as stuck in the past at Lloyds, but the London Metal Exchange introduced a code of conduct for the first time, so that members and clients are clear about whether you can organise a cocktail party at the Playboy Club using LME branding (you can’t). (Financial News)
A senior UBS wealth manager has left, apparently after a “turf war” where he felt he was being given regulatory responsibility for operations that someone else was in control of (Reuters)
European securities watchdogs have come up with an alarming list of 6,200 stocks (including some large British ones) which they would insist EU investors could only trade in the EU in the event of no-deal Brexit (FT)
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