Deutsche Bank’s second quarter results are out and, like both its U.S and European rivals, its investment bank has done rather well.
CEO John Cryan will be hosting a conference call at 2pm GMT – this is unusual as it’s traditionally at 8am – so more details could emerge then.
In the meantime, he’s been blunt on what needs to be done to Deutsche Bank – the second quarter “highlights the strengths and challenges facing Deutsche Bank”, he said, but costs need to be stripped out. “We must shrink our balance sheet, focusing on our many low-return assets. We must reduce organizational complexity, which inhibits effective decision-making, blurs accountability and embeds wasteful cost.”
Cryan also, according to reports in German newspapers, sent a memo to employees yesterday telling them that costs at Deutsche Bank were "unacceptable".
What else do you need to know about the happenings at Deutsche Bank’s corporate banking and securities unit?
1. Front office headcount is shrinking
As we’ve mentioned on numerous occasions, senior bankers and traders are heading for the exit at Deutsche Bank. It now has 7,895 people working in the front office of its investment bank, down from 8,204 at the end of 2014 – or a decrease of less than 4%.
This doesn’t seem drastic, but when you consider that 1,900 jobs were lost in revenue generating roles across the entire investment banking industry in Q1, it’s not insignificant. There is, however, obviously more scope for cuts.
In the second quarter, Deutsche paid out €24m in severance costs for its employees in investment banking – exactly the same as Q1 2015, or €48m for the first half. To put this in context, it shelled out €46m to departing employees for the whole of 2014, €5m in Q2 last year and €26m in 2013.
2. But it’s been hiring elsewhere
Across the entire investment bank, headcount is up by 1,243 people since the end of 2014 and now stands at 27,079. Compare this with UBS, which has 5,192 employees and Deutsche Bank seems vast. Much of this recruitment, predictably, has been in regulatory related roles, which in the current high-demand environment are unlikely to be cheap.
3. Compensation costs are on the up
Blame ‘currency fluctuations’ – Deutsche Bank reports in euro, which has been tumbling – but compensation costs have been on the up in its investment bank. Compared to Q2 last year, compensation expenses are up by 19% and for the first half they’re up by 10%. Some of this, undoubtedly, has to be down to increased headcount, but also improved performance in its investment bank.
On a per head basis, this means an average accrual of €114.9k ($126k) for the first half of 2015, compared to €109.8k in the first half of 2014.
4. FX and rates good, credit bad
If you wanted to break down the performance of its fixed income trading division during 2015 – up 12% in the first half and 16% on Q2 2014 – FX was the best place to work, followed by rates. But in line with other investment banks, Deutsche’s credit team was hit by “difficult market conditions and widening spreads”. Distressed traders also did well in both Europe and US, while Deutsche’s credit solutions and emerging market debt teams were relatively flat.
5. Deutsche matches Morgan Stanley with equity uptick
Like Morgan Stanley and UBS, Deutsche Bank has succeeded in increasing revenues within both equity and fixed income trading. Equities trading revenues were up a huge 39% year on year, eclipsing its rivals on a proportional basis. However, while Morgan Stanley made $2.27bn in Q2, Deutsche made €975m ($1.06bn).
6. M&A is the place to be in advisory
Deutsche’s M&A bankers made €144m in Q2, which is an 11% uptick on this time last year, and for the first six months of the year it made 22% more than H1 2014. In DCM, by comparison, revenues were up 10% in the second quarter year on year and 15% on the first half. The reduction in equity capital markets activity – following a stellar period last year – means that revenues here were down 5% in Q2. However, for the first half ECM bankers were still up by 8% year on year.