Morning Coffee: It's 2019 and Deutsche Bank would like everyone to calm down. No long-distance commuting after Brexit

Banks typically try not to say that they are well-capitalised and have no need of state aid, because it tends to invite speculation as to why the reassurance might have been necessary.  But when you’re the chairman of Deutsche Bank, giving a year end interview to Frankfurter Allgemeine, the question is bound to be asked and it’s impossible to duck.  Paul Achleitner states the case as strongly as possible “Deutsche has a very strong capital base, even compared to its competitors”, and with respect to state aid “this scenario will not come about.” However, after the year Deutsche has had, and with the share price down from just under €16 at the start of the year to €6.97 at yesterday’s close, it’s not hard to see why Mr Achleitner is on more comfortable ground giving his views on macroeconomics and Donald Trump.

This was meant to be the year that Deutsche put its legal troubles behind it, and to an extent that’s what’s happened – the Deutsche Bank Violation Tracker only records four US penalties this year, totalling less than $200m.  The bank even managed to settle one set of investigations into the German “Cum-Ex” scandal for a token $4m and gained immunity in an EU antitrust investigation.   However, with police raiding the headquarters building over issues arising from the Panama Papers, the whole cycle looks like it might begin again.  And this year, in any case, Deutsche’s problems have been more managerial than legal.

It started back in April, when CEO John Cryan was dismissed, in confusing circumstances which led some investors to criticise the chairman.  A month later, it was revealed that the bank was considered a “problem” institution by one of its main US regulators and a “troubled” one by another.  The regulators were finally losing patience with the key issue that’s been the Achilles Heel of Deutsche ever since the financial crisis; its rapid growth and complicated derivatives operations have left it with a set of creaking, incompatible reporting systems that aren’t up to the task of providing information that either regulators or management can be comfortable with.  Sorting out the mess is a task that’s defeated several top teams, and until this is done, it’s incredibly difficult for Deutsche to compete.

The man who was placed into this unenviable role was Christian Sewing, who promptly sent out a perfect set of mixed messages, reiterating Deutsche’s commitment to investment banking (and to the USA, and to Asia), while nevertheless demanding big job cuts and shaking up top management, but only promising 3% overall cost reductions to shareholders.  This caused predictable damage to Deutsche’s franchise and reputation, which ended up needing to be built back in some key areas.  Toward the end of the year, we started noticing that Deutsche was hiring in a number of areas, and paying the usual “danger money” to do so.

Will things turn round next year? If so, it won’t be cheap. Deutsche is correct to say its capital position is sound, but capital isn’t the problem; the franchise is, and the franchise is increasingly made up of scared, unhappy and relatively junior people. The telling moment will be the 2018 bonus payments, which have the potential to cause trouble. With less compliance overhead, undemanding cost cutting targets and significantly lower headcount, these should be an opportunity for Deutsche to reward loyalty and demonstrate its continuing seriousness.  If Deutsche wants people to stop asking unpleasant questions, it needs to put its money where its mouth is. Whether it will remains to be seen.

Separately, by and large, US banks had a better 2018.  But next year brings some knotty personnel problems for many of them, particularly relating to London staff working for business lines that are scheduled to move to Paris, Dublin, Amsterdam or Frankfurt after Brexit. Some senior staff, mindful of both their settled family lives and the comparative lack of amenities in those cities (well, other than Paris), have had it in mind to live an international commuter lifestyle, flying back between London and Europe.

The message coming from the employers is “not on our dime”.  JP Morgan and Morgan Stanley are offering six months worth of “smoothing” tax differences, help with travel and support for families who don’t want to move during the school year, and that’s it.  Citi is being even tougher according to the FT; just the standard relocation package to help you with the removals.  Goldman’s plans are “in flux”, but staff are being encouraged to understand that “they’re gone for good” and that they shouldn’t expect a commuter package.  Brexit means brexit, after all.

Meanwhile ...

When some people say “Artificial Intelligence is overhyped and will never replace human traders” it sounds a bit like sour grapes. When David Harding (the “H” in AHL, founder of Winton Capital and one of the most successful quant investors ever) says it, the view commands a bit more respect. (Financial News)

Crispin Odey, on the other hand, has always relied on his own views. In their recent accounts, his firm saw its profits halve, mainly due to the legacy of 2017.  Having had a market-leading year in 2018, however, he ought to do better next year (Financial News)

And the hiring boom for quants and data scientists shows no signs of abating; a poor performance year for quant funds in 2018 is just being seen as an opportunity for big diversified houses to staff up at the expense of specialist firms who had a lean year. (Business Insider)

How do you steal a hundred tons of cobalt from one of Holland’s most secure warehouses? It takes a bit of planning (Bloomberg)

The British Foreign Office runs a helpline for citizens overseas.  Not everyone calling it seems to have a clear idea of what constitutes an “emergency” (one caller thought that the New Delhi embassy had vegetarian sausages for sale) (Bloomberg)

Sad montage time – these were the hedge funds we said goodbye to in 2018 ... (Bloomberg)

... and these Swiss banks disappeared from the sector too (Finews)

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