DEUTSCHE BANK AG is considering substantial cuts to the unit that trades interest-rate securities, a division that survived a large-scale pullback as part of the lender’s sweeping revamp in July.
Chief Executive Officer Christian Sewing has concluded that it’s possible to reduce enough of the associated technology costs to outweigh the loss in revenue, according to people briefed on the matter. The bank will likely cut a low double-digit percentage of jobs at the business, which employs several hundred staff, said one of the people, adding no final decision has been made. A cut of 10% would translate into fewer than 100 jobs at risk.
“We are committed to a robust and broad-based rates platform, and are investing in areas of our rates business where we see opportunities to grow our client franchise,” Deutsche Bank spokesman Charlie Olivier said by e-mail.
The bank is currently putting the finishing touches on a review of the unit, which has struggled with low profitability for some time, said the people, asking not to be identified discussing the private information. Findings could be presented at the bank’s investor day in December.
Sewing in early July presented a sweeping restructuring plan centered on pulling back from equities trading and cutting a fifth of the workforce. The lender said at the time that it wants to remain a “leading bank” in fixed-income trading, its traditional strength, but it soon became clear that adjustments were needed there, too.
The rates business, headed by Kemal Askar, falls into many different geographic regions — including the US — and includes a range of products — such as options or swaps. Pulling out of any one of them only makes sense if the bank can eliminate associated costs of information technology, the people said.
In rates trading, investors buy and sell products such as government bonds and derivatives to profit or protect themselves from macroeconomic developments that affect interest rates. It’s distinct from credit trading, where participants buy and sell debts and derivatives to wager on a company’s ability to repay loans.
“We are a significant player in rates, but rates is an area where we need to refashion the business model to make it more profitable and do so against the resources that we have there,” Chief Financial Officer James von Moltke said last month.
Deutsche Bank plans to maintain a significant operation in the rates business because it sees the unit as an important element of its product offering for companies, one person said. Interest rate swaps are a common risk management instrument for companies seeking to achieve long-term stability in their financing conditions.
The lender has previously tried to scale down various investment banking units, only to subsequently realize it was unable to cut tech spending and other costs as quickly as initially expected. The bank is currently also seeking to sell a portfolio of interest-rate derivatives.
“One of the key concerns we have with Deutsche Bank is that the reduction of exposure” in the investment bank “could continue to impair its franchise,” Berenberg analysts led by Eoin Mullany wrote in a note on Monday before the Bloomberg story. “We remain skeptical as to its ability to keep investment banking revenue flat given that it faces headwinds that are both structural and cyclical.”
The banking industry as a whole has seen the business of buying and selling interest rates decline. The global revenue pool shrank to $10.1 billion in the first six months of the year, down by 17% from the same period in 2018, according to data provider Coalition. That was the largest drop among the six asset classes included in trading fixed income and currencies. — Bloomberg