It was of special importance because up until now, Deutsche's DCM desk had pretty much got away with it. Staffing levels are down (a bit), compensation is down (a lot) but basically, the business has been fine. There is more volume in primary markets and individual deals are larger than ever before.
Furthermore, Deutsche is high enough up the league table to catch a decent slice of the business — sixth in the global league table and fifth in Europe, according to Dealogic. That’s a decent leg down from Deutsche’s historic dominance, but it’s still respectable, and enough to make it worrying that the bank has started cutting there.
That makes it strange that Deutsche would potentially cut at least five managing directors, with shifts sideways or outwards for other bankers in the DCM and solutions group.
But it’s also significant that all the bankers involved are managing directors. They are likely all major producers but a team, like Deutsche’s financial solutions group, which has more than 30 of them, looks like an expensive luxury in this day and age.
Banks have reportedly been looking after junior staff, who are seeing greater differentiation in this year’s round of compensation, and relying on juniors more and more to run execution. Senior staff should be a cost-effective skeleton crew.
The cuts are also slightly biased to the solutions side, rather than cash bonds. Banks are increasingly folding the businesses together, but that might just make it easier to argue that it’s duplicative to have separate product people for bonds and derivatives.
Some also saw the Deutsche cuts as a sign of the eclipse of its financial solutions group (the former capital markets and treasury solutions group) following its merger with leveraged finance. The boss of the combined DCM group, Mark Fedorcik, is from leveraged finance, while Henrik Johnsson is his man on the ground in Europe, now running EMEA syndicate and managing the DCM group. Miles Millard, the creator of the CMTS group and its former boss, signalled in the autumn he would step down, so it may be lacking executive level sponsorship.
Africa off for Barclays
But in other restructuring news this week, Barclays was the big news. The last big Barclays course-reversal was in May 2014, which saw the “origination-led” strategy come to the fore, and Africa still one of the bank’s major strengths.
Now Africa is off the table, leading bankers to question what that means for the firm. In capital markets, perhaps not much. It is questionable whether Barclays needs a 62% stake in a local lender to compete vigorously for bond and loan mandates in the region, but it does need certainty, capital commitment and motivated bankers.
Share buyers were less than enthusiastic, though that could have been down to the dividend cut. GlobalCapital finds it hard to understand how equity investors could have sat through this year’s round of ugly investment banking results and expected the Barclays divi to hold firm, but apparently it was a surprise — the shares took a 10% fall.
The investment bank managed to make a loss this quarter, with all the businesses showing hefty percentage decreases except credit, which was in line with Q3 and 28% up on Q4 2014.
Perhaps it’s also worth pausing on the relative sizes of the businesses. Lots of the press and analyst community talk about Barclays as though it’s still an unreconstructed flow bond house with the remnants of Lehman on the side.
But with £456m in investment banking fees, and only £325m in macro last quarter, that simply isn’t true any more. Even adding in the £221m in credit, it looks like “origination-led” is having some effect on the balance of the business.
Barclays is still announcing more changes. Monday morning saw a new chairman of EMEA M&A, and a team hire from CMC Capital. But the next big thing will be Tom King’s replacement as head of the investment bank. David Rothnie’s Southpaw deals with the issues at hand, and is cautiously optimistic. It’s not going to be an easy job to do, but the toughest times for Barclays are (hopefully) behind it.
The regulatory environment for Barclays is still tough, but a welcome reprieve for some of the smaller UK-regulated firms last week.
The UK’s FCA and PRA are tough on a whole host of regulatory issues. Monday marks the beginning of the Senior Managers Regime, which means direct personal responsibility for the senior management at banks, no more buck passing and, potentially, prison time for those caught engaging in “reckless misconduct in the management of a bank”.
But they’re willing to go to the mattress for bonus payments. The two regulators have, in fact, defied the European interpretation of bonus rules, on somewhat questionable legal grounds, and as a result, the UK financial system may even be safer.
It’s got to be good news for the UK challenger banks, who seem to be in excellent shape. Admittedly, their preferred businesses of mortgage and SME lending don’t attract quite so many expensive mouths to feed, but they’re in a need of a bit of flexibility to compete effectively with the UK majors.