Deutsche Bank's U.S. equities professionals are afflicted by strategy fatigue

There's a sense of lethargy in Deutsche Bank's U.S. equities business. After 25% of DB's equities professionals lost their jobs last year, Deutsche was supposed to be done with cost-cutting in its front office. But Bloomberg suggested earlier this week that DB is re-thinking its U.S. equities strategy (yet) again after merger talks with Commerzbank failed. 

"We're calling this 'Plan C'," says one of the senior equities professionals at Deutsche Bank's Wall Street Office, speaking off the record. "It seems the management have no idea what they're doing. None of us are sure where the cuts are going to land."

Deutsche Bank declined to comment on Bloomberg's article, which quoted unnamed insiders as saying that DB is considering further, 'deep cuts within equities, including research and equity derivatives.' 

If true, it would mark a shift to the approach articulated at the time of Deutsche's first quarter results in April. Then, CEO Christian Sewing and CFO James von Moltke were very clear that they were simply pursuing Sewing's strategy of 2018, and that no new major cost reductions or front-office layoffs were on the table, irrespective of the failed talks with Commerz. - In fact, von Moltke said front office headcount was being intentionally maintained. 

DB's U.S. equities professionals are not entirely convinced, however. Nor were they entirely reassured by the equities townhall run by head of equities Peter Selman in March, when Selman insisted that Deutsche was committed to investing in the U.S. market because 60% to 70% of equities investment decisions are made by people in the U.S., and because U.S. clients were looking for a different counterparty to large U.S. banks.

In theory Deutsche is now focused on electronic trading in the Americas, but Heidi Fischer, its co-head of Americas cash execution resigned earlier this month following the arrival of Greg Sutton from Citi to lead the cash execution business in March 2019.

Deutsche's U.S. equities business is widely held to be loss-making, although there's a dispute as to exactly how much it loses annually. In March, Bloomberg said the DB equities business as a whole lost $750m last year and that the U.S. equities unit in particular, 'hasn't turned a profit for many years.' Selman strongly refuted the $750m number in his subsequent townhall, but JPMorgan's banking analysts themselves suggested last month that Deutsche's U.S. equities business loses €200m-300m annually...

In this context, a shrinking top line is not great. Revenues in Deutsche Bank's equities division fell 19% year-on-year in the first quarter. This was similar to the likes of Barclays, Bank of America and UBS, but the second quarter is unlikely to provide much solace. - KBW's analysts are expecting Deutsche's equities revenues to fall by another 7.8% in U.S. dollar terms, and by 3% when measured in euros. When you already have a €200m - €300m U.S. cost overhang, this isn't helpful.

This isn't to say that Deutsche hasn't been cutting equities costs again already. At his townhall, Selman said equities has been the beneficiary of an "activity-based costing" overhaul from James Von Moltke, under which the central infrastructure costs historically allocated to equities were found to have been excessive. 

Maybe this will be enough? But maybe it won't, and several U.S. equities staff haven't been waiting around to find out. 

In a few weeks' time, Deutsche's 35 U.S. equities interns will arrive. "This is a big number of kids with a lot of energy. Let’s treat them like the future that they are," said Selman in March. Some of his staff may be a little too worn-down by uncertainty for that.

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