The baaaaad news for Deutsche Bank's fixed income traders

Don't let it be said that Deutsche Bank hasn't been cutting people, curbing costs and generally doing very well in these challenge times.

During his presentation at the Bank of America Merrill Lynch conference today, Anshu Jain declared himself very "gratified" by Deutsche's new efficiency. Deutsche's Corporate and Investment Bank is 'focused on doing more with less', said Jain. Over the past year, Deutsche has cut full time front office headcount by 12%. It's reduced Basel 2.5 risk weighted assets by 19%. And it's increased its Basel 3 common tier one equity ratio from less than 6% to near 10%.

At the same time, Deutsche has increased its equities sales and trading revenues by 30%. It's increased its equity and debt capital markets origination revenues by 38%. Big pat on the back.

Except that things aren't quite going to plan after all. The goal posts have moved. As Jain also pointed out, regulators are now a lot less bothered about equity ratios and a lot more bothered above leverage ratios. And in terms of leverage, Deutsche doesn't look so hot. As the chart below from Jain's presentation shows, Deutsche only just meets the current European leverage ratio requirement of 3%.  

With this in mind, Deutsche is cutting another €250bn of 'leverage exposures', including €130bn from such things as optimizing collateral management, reviewing the 'trading inventory level' and taking 'portfolio measures.'

Unfortunately, these new measures coincide with what Jain described today as a "significant" decline in third quarter fixed income sales and trading revenues, making Deutsche's fixed income trading business look ripe for curtailment. "The fundamental business model [across the market in fixed income] is being reconfigured," said Jain.

Until now, Deutsche Bank had claimed that its fixed income business was invulnerable to market changes on the grounds of its size. Last October, Stefan Krause, Deutsche's CFO, said the bank had no plans to pull back from fixed income because it was big enough to generate good returns in any market. Today's admission that Deutsche's fixed income revenues have plummeted along with those at Jefferies, Barclays and Citi suggests the German bank isn't quite as immune as it thought it was. Couple that with the reductions in leverage exposures and Deutsche's fixed income professionals have good reason to feel a bit jittery.