By Jenny Strasburg and Telis Demos
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 3, 2019).
Deutsche Bank AG is taking steps to dismantle a pillar of its
Wall Street investment bank.
The troubled German lender has had discussions with Citigroup
Inc., BNP Paribas SA and others that could lead to a sale or
transfer of parts of its once-prized equities business, including
operations that serve hedge funds and other big trading customers,
according to people familiar with the matter.
The possible moves portend a dramatic reshaping of Deutsche
Bank's U.S. investment bank, a business it battled the likes of
Goldman Sachs Group Inc. and Morgan Stanley to build. Without a
muscular equities-trading operation, Deutsche Bank will occupy a
much smaller footprint when competing with healthier U.S. rivals
that have come to dominate their European counterparts in the
postcrisis era.
No agreements have been reached in what one of the people close
to the matter described as complex talks involving multiple
parties. Any deal is being weighed against the costs Deutsche Bank
would face to shut businesses, including severance costs, and costs
to hold on to long-dated derivatives positions.
Spokespeople for Citigroup, BNP Paribas and Deutsche Bank
declined to comment.
The talks are happening as the once-dominant German bank
prepares a major reorganization aimed at shedding thousands of jobs
and downsizing or abandoning whole business lines. Its equities
business, in which its prime brokerage sits, was once a key revenue
driver within the investment bank. It is now among those on the
chopping block as the bank ends long-frustrated efforts to compete
in an area dominated by stronger rivals, the people said.
The discussions, which are continuing, could involve Deutsche
Bank employees moving to one or more other banks alongside client
balances, systems, and derivatives positions, some held by Deutsche
Bank to offset bets taken by its clients. The talks have included
corporate derivatives positions Deutsche Bank has looked to shed,
one of the people said.
Following the global financial crisis, Deutsche Bank ramped up
its global ambitions, pushing deeper into equities trading,
hedge-fund financing and investment banking in general. The German
bank pounced on clients of U.S. banks when they were at their
weakest. In more recent years, however, it has grappled with
stronger competition in what has become a money-losing, high-cost
part of its business.
For Citigroup, any such deal would help it become a bigger
player in equities, where it has recently dedicated more resources,
particularly in prime brokerage. The bank has historically lagged
behind its U.S. megabank peers in stock trading, despite having a
leading fixed-income-trading unit. Citigroup has narrowed the gap,
partly thanks to the struggles of European rivals.
Some top Citigroup trading executives are familiar with Deutsche
Bank's equities business, having previously worked at the German
bank, including Citigroup global equities co-head Murray Roos. He
overlapped at Deutsche Bank with Ashley Wilson, who is overseeing
equities-restructuring discussions at the German bank, people close
to the bank said.
Deutsche Bank's prime brokerage business has long had a
high-profile client roster with hundreds of billions of dollars in
assets at its peak. Top clients include algorithmic-trading giants
Renaissance Technologies LLC and Two Sigma Investments LP,
according to people familiar with the business.
Deutsche Bank was a top-six prime brokerage player globally as
recently as 2017, according to industry research firm Coalition.
But last year its ranking fell into a lower tier, placing it in the
top nine.
Prime brokerages lend cash and securities to hedge funds and
other asset managers and structure and execute trades for them.
Lucrative client relationships bring in other business -- from
financing private art collections to underwriting investor
campaigns -- generating more fees.
Technology has made executing trades cheaper and less
profitable. The most sophisticated trading firms don't consume much
research or bank strategists' advice, often doling out their
business to banks willing to lend.
The pool of assets handled by Deutsche Bank's prime-brokerage
unit has shrunk significantly as executives waffled over strategy
and the bank cut risk-taking, said people with knowledge of the
operations. Many hedge-fund clients fled in 2016 when the bank's
health came into question.
Last year, Deutsche Bank Chief Executive Christian Sewing said
the bank would refocus scarce resources away from certain trading
operations to concentrate on serving German companies, retail
customers and wealthy individuals.
In late May, with long-suffering investors sending Deutsche Bank
shares to new historic lows, Mr. Sewing promised "tough cutbacks"
in the investment bank.
Sales of prime-brokerage operations and associated derivatives
portfolios are complex but not unheard of. In mid-2008, Bank of
America Corp., looking to shrink its investment bank, sold its
equities prime-brokerage business to BNP just before the worst of
the financial crisis hit. Months later, Bank of America agreed to
buy Merrill Lynch & Co.
Write to Jenny Strasburg at jenny.strasburg@wsj.com and Telis
Demos at telis.demos@wsj.com
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July 03, 2019 02:47 ET (06:47 GMT)
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