Could the end be nigh for Deutsche Bank’s prime brokerage unit?

The TRADE looks at how Deutsche Bank, among the top five prime brokers not so long ago, ended up in a situation where the future of its prime brokerage business is in question.

Dark clouds have been looming over Deutsche Bank’s US prime brokerage business for nearly three years. Concerns began to arise in 2016 when a multitude of fines were on the horizon, a number of high-profile hedge fund clients were pulling their money, and the business saw its situation go from bad to worse.

Its downward spiral was evident in The TRADE’s sister publication’s 2018 Prime Brokerage Survey. According to the Global Custodian survey, Deutsche Bank was ranked the third lowest among the 25 providers. One respondent even noted: “We do not have any active fund/client currently using DB as their PB. Last activity was in February 2017.” This was in stark comparison to its performance in the previous years where it was highly rated.

On Tuesday, the future of the business took a new turn as the Wall Street Journal revealed the German bank was in talks with Citi, BNP Paribas and others that may lead to a sale or transfer of parts of its once-prized prime brokerage business. The revelation followed months of speculation that Deutsche Bank would be making large-scale cuts to its investment banking division, most notably in its US equities franchise.

In response to the news, a spokesperson for Deutsche Bank said: “As we said at the AGM on May 23, Deutsche Bank is working on measures to accelerate its transformation so as to improve its sustainable profitability. We stated that we would update all stakeholders if and when required.”

So how did Deutsche Bank, which at one time was among the top five prime brokers following the financial crisis, end up in a situation where the future of its prime brokerage business is in question? We take a look back at the key defining moments for Deutsche Bank’s prime unit:

April 2015 – Co-head of global prime finance Murray Roos leaves Deutsche Bank to take on global equities role at Citi. Deutsche Bank, at the time, said it was planning to reduce its balance sheet by €200 billion, of which €40-50 billion will be through client reduction.

August 2015 – Deutsche Bank’s co-head of global prime finance for North America, Scott Carter, departs to join hedge fund AQR Capital Management.

September 2016 – Bloomberg reports 10 hedge funds have moved to limit their exposure to Deutsche Bank and have withdrawn funds, fearing the bank could collapse under the weight of a potential $14 billion fine from the US Department of justice. Hedge funds that had pulled business include the $34 billion hedge fund Millennium Partners and the $14 billion Capula Investment Management, according to Bloomberg.

October 2017 – Marcelo Pizzimbono, head of US prime brokerage, joins Goldman Sachs for senior equity sales role.

July 2017 – Deutsche Bank cites prime finance as the major reason for a 28% decrease in equities revenue, off the back of lower margins and lower client bases. However, it said client balances had returned to pre-September 2016 levels.

April 2018 – Deutsche Bank says it is considering making significant cuts to its US prime finance business as part of a wider restructuring programme to the investment banking unit. The plans include a significant reduction in headcount across the US and Asia.

May 2018 – Plans are revealed to reduce Deutsche Bank’s leverage exposure in prime brokerage by around €50 billion, alongside 7,000 job cuts to the global equities sales and trading unit.

September 2018 – Greg Bunn, its global co-head of prime finance and 20-year Deutsche Bank veteran, departs. Matt Bowen and Angus Yang were appointed to co-run the business. Deutsche Bank spent much of 2018 pitching to its largest clients to be their top European prime broker, rather than drum up new business.

April 2019 – Merger talks with Commerzbank collapse, renewing pressures to make radical cuts to its US investment banking business.

May 2019 – Reuters reports Deutsche Bank’s prime brokerage unit was highlighted as a key focus for cutbacks, as CEO Christian Sewing warned shareholders of a transformational phase to its investment banking division.