Deutsche Bank has said it will “selectively reinvest” in less balance sheet intensive businesses including prime brokerage as the firm as a whole seeks to reduce its investment banking and global markets clients by up to 50%.
The bank’s Strategy 2020 would also envisage exiting certain products including un-cleared credit default swaps (CDS), residential mortgage-backed securities trading and higher risk-weighted securitised trading. The statement also said it would “materially reduce the number of client relationships.” Other areas ear-marked for selective reinvestment include client solutions and credit lending.
Deutsche Bank highlighted that approximately 30% of its global markets and corporate and investment banking clients accounted for 80% of revenues. As such, Deutsche Bank said it hoped to increase product cross-selling among these core clients.
As part of the efficiency drive, which Deutsche Bank hopes will save €3.8 billion, the bank is to close a number of onshore operations in Argentina, Chile, Mexico, Peru, Uruguay, Denmark, Finland, Norway, Malta and New Zealand. It also said it would move trading activities in Brazil to global and regional hubs.
Deutsche Bank added it would reduce full-time staff by 9,000 and scale back on 6,000 external contractors deployed to its global technology and operations infrastructure. This comes as the German bank announced in early October 2015 that it was likely to incur a €6.3 billion net loss in the third quarter.
Deutsche Bank said €1.2 billion would be set-aside to deal with on-going litigation costs, as well as write-downs over the value of its retail subsidiary Postbank, which it is hoping to dispose of. The bank also said it would incur a €600 million charge for reducing its 19.99% stake in Hua Xia Bank in China, which it added was no longer strategic.
This strategic review could spell bad news for some of the bank’s hedge funds, although this has not been confirmed. A number of other banks, driven by Basel III capital costs, have scaled back the number of hedge funds that they actively work with.
Hedge fund cash in banks is viewed by regulators as a high-flight risk during volatile markets, and Basel III stipulates banks must hold more capital against it. This is prompting a number of prime brokers including Credit Suisse, Bank of America Merrill Lynch and Goldman Sachs to terminate relationships with certain hedge funds, particularly those with limited Assets under Management (AuM), or those that have failed to grow meaningful AuM.
These hedge funds are having to rethink their prime brokerage providers with some reducing the number of prime brokerage counterparties they have, a marked shift from the post-2008 strategy whereby firms sought to spread their counterparty risk across multiple prime brokers.
The majority of institutional investors recognise the predicament hedge funds are in. However, having a prime brokerage relationship abruptly terminated is not a good omen for hedge funds and could precipitate investor redemptions.
It could force other hedge funds to work more closely with mid-tier or even mini prime brokers, which appear to be enjoying something of a resurgence. While these entities are known to be more flexible than traditional bulge bracket prime brokers, they lack balance sheet capital, which can be a red flag for some end investors.