Peter Selman had a good rest before he joined Deutsche Bank. After a 22 year career at Goldman Sachs which ended when he retired (in Goldman vernacular) in September 2016, 45 year-old Selman arrived at Deutsche in December 2017. That’s 14 months’ relaxation. He’s hopefully feeling refreshed: as the new global head of equities at DB, Selman faces a Sisyphean struggle to turn the business around.
Deutsche Bank’s full year results, released last Friday, reflect the size of Selman’s task. While equities revenues at U.S. banks were flat last year according to J.P. Morgan, equities revenues at Deutsche Bank fell 19% on 2016. In this sense, Deutsche’s equities business under-performed its fixed income business, for which J.P. Morgan points out that Deutsche’s 11% year-on-year revenue decline was at least comparable to the 12% drop at U.S. investment banks.
The decline in Deutsche Bank’s equities business isn’t for want of trying. Long before the arrival of John Cryan as Deutsche CEO, Anshu Jain was trying to rebalance Deutsche’s sales and trading business away from fixed income and towards equities. Under Cryan, Deutsche set about hiring 100 people for its equities business in early 2016. Nonetheless, Morgan Stanley’s analysts calculated that equities accounted for just 14% of Deutsche’s investment banking revenues in the first nine months of 2017, versus 45% at UBS, 28% at Credit Suisse and 33% at SocGen. Research firm Coalition says Deutsche Bank’s equities business ranks seventh to ninth globally; it’s not exactly a key player.
Deutsche Bank declined to comment for this article. Equities headhunters say Selman plans to hire once bonuses have been paid. There are gaps to be filled. Last week, Marcus Schenck, Deutsche’s investment banking co-head, blamed the bank’s poor fourth quarter revenues on departures from the equity derivatives business and highlighted Selman’s own equity derivatives background. The German bank already hired Daniel McNeil, the former U.S. head of equity derivatives at Credit Suisse, in January.
Selman needs to hope the new blood brings new vitality. Deutsche Bank’s equities business hasn’t exactly been deprived of staff: last year it hired two managing directors and six directors, including Eric Johnston as head of U.S. cash equities trading. A former Barclays and Lehman Brothers trader, Johnston joined in August according to both his LinkedIn profile and FINRA. That may have been too late to make much difference to 2017, but the effects of the new hires should really be noticeable in the first quarter.
Unless, of course, Deutsche’s equities problems run deeper than just talent. Deutsche’s electronic trading system, Autobahn, was one of the first on the market and was voted the best electronic trading platform in the market in 2013. However, while Citi launched its new machine learning algorithmic trading platform, Optimus, in 2015, Deutsche only plugged AI capabilities into Autobahn in December 2017, with an initial roll-out restricted to Asia. The delay could be seen as symptomatic of under-investment in trading technology, not helped by the fact that the two co-head of equities for Autobahn in Europe left for Exane last year.
As Selman struggles to get to grips with Deutsche’s business, he may want to heed the words of those who tried before him. Dixit Joshi, who is currently Deutsche’s group treasurer but who joined the bank as EMEA head of equities in 2010, said last January that banks are moving away from executing high volume low margin trades and focusing on the higher margin “client solutions” business (hence the focus on equity derivatves). Meanwhile, Kerim Derhalli, a former head of equities trading at the bank, has been touring U.S. universities proclaiming that the glory days of equity trading are over. “The cash equities business was barely profitable at the best of times and when volumes collapsed it became unsustainable for a lot of players,” Derhalli told us last year, adding that banks like Nomura had already pulled out of equities trading in Europe and that remaining players have become, “hyper-efficient about costs.”
Even John Cryan, the former FIG banker who signed-off Selman’s hire and is surely optimistic about his abilities blew cold on the equities business last week. Equities trading is an example of a business that has changed dramatically as margins have eroded and activity has moved away from banks, said Cryan. Banks need to question whether they want to be involved in this kind of business, Cryan added, before clarifying that he was just using equities as an example and wasn’t suggesting Deutsche pull back from trading equities. Even so, it’s something that could bear thinking about – particularly if Deutsche’s latest round of hires fails to reinvigorate the business and Selman finds the malaise runs deeper than simply his staff.
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