Morning Coffee: Deutsche's desperation to stay in the FICC game. How banking destroys the insecure liberal arts graduate
Surprise!! Deutsche Bank needs more money. Having raised €3bn in capital only last year and said at the time that this was the end of the matter, Deutsche surprised no one last night when it announced that it plans to raise another €8bn by June 24th. In doing so, it will hike its tier one equity ratio from 9.5% to 11.8%.
So far so good, except, as - and various sources point out - Deutsche's capital hike will simultaneously reduce its return on equity (RoE). The German bank is now aiming for an RoE of only 12% by 2016. UBS is going for an RoE of 15%. Credit Suisse is going for 23% (in its investment bank). Deutsche's diminished RoE target therefore looks more like a baseline than an aspiration. Equally unfortunately, the Financial Times points out that Deutsche plans to raise €6.3bn of the €8bn from investors at a time when the bank's share price has fallen 25% since January. And the new money may not even fully plug Deutsche's capital hole, which some analysts have put at €10bn.
So what will Deutsche's extra €8bn do? The FT's Lex column says it will leave Deutsche one of the 'best capitalized banks in Europe.' Most importantly, it will give the German bank the means to maintain its place in the capital-hungry fixed income currencies and commodities (FICC) business. Deutsche has been progressively losing market share in FICC but is insistent that it wants to build its presence- especially in the U.S. market, where it faces additional capital requirements under new U.S. rules concerning the capitalization of local subsidiaries. From this perspective, Deutsche's capital call can be read as a bet on the bank's attempt to protect its FICC business under the leadership of Anshu Jain. The alternative, says the FT, would be for Deutsche to pull back from FICC in the style of Barclays or UBS. With investors' assistance Deutsche won't be doing that, yet.
Separately, Kevin Roose, the U.S. journalist who followed eight young graduates in their first years on Wall Street and wrote a book about it, has been opining about the pernicious effects of banking careers on university leavers who don't know what they're getting into. Banks are experts are attracting insecure liberal arts graduates who aren't sure what they're going to do with their lives, says Roose. Several years on, he claims that some of these graduates who go into banking find themselves 'ruined' in a way that a holiday cannot cure. "It gets them used to a standard of lifestyle they may not be able to replicate in any other industry," says Roose. "And it has a deleterious effect on creativity... It's not about having bags under your eyes. It destroys your ability to think in creative ways about what it means to build something of value." On the other hand, Roose added that banking is a great career if you're genuinely interested in finance and have big debts to pay off.
Brady Dougan and Urs Rohner might BOTH resign. (Swissinfo)
RBS is pulling back from rates trading and will close the business over the next 3-8 months. Rates prime broking and OTC clearing are going. FX prime broking services are staying. (Financial Times)
Lloyd Blankfein says no one really knows whether FICC revenues will recover: “I would say with complete and utter confidence that nobody knows anything. We’re prepared for a market that stays this way, we’re prepared for a market that’s lower. We’re prepared for a market that’s more volatile.” (Financial Times)
Investment banking revenues fell 9% in the first quarter. Fixed income revenues fell 16%. (Reuters)
Rothschild is launching a new arm called Risk-Based Investment Solutions. Initially it will only have five employees. (Telegraph)
Bonuses at Goldman Sachs are capped at 1% of the firm's income for each member of its management committee (DealBook)
In which it becomes apparent that hedge fund managers don't really dance. (Instagram)