“I don’t want to sell anything, buy anything, or process anything as a career. I don’t want to sell anything bought or processed, or buy anything sold or processed, or process anything sold, bought, or processed, or repair anything sold, bought, or processed.”
– John Cusack as Lloyd Dobler, “Say Anything”
Few others have captured our attention here at Alphacution like Deutsche Bank (DB). This phenomenon comes as a result of the collision of two facts: 1) a bulge bracket bank in an ongoing state of radical transformation which 2) has simultaneously provided a consistent level of financial and operational transparency to fuel one of Alphacution’s most detailed and illuminating sell-side models. This model – along with our vision of the evolving landscape – has supported the production of a series of content along two inter-related themes: technical infrastructure outsourcing and the strategic communications around headcount shrinkage. Links to each of our DB articles can be found below, and now that some of our predictions are mostly in the rearview mirror, they may prove a more interesting read today than when they were originally developed:
@DeutscheBank + @HPE: Case Study on Impacts (July 2018)
@DeutscheBank: Predicting the Pace of Shrinkage (February 2017)
With the July 8th announcement that DB would be undergoing (another) radical restructuring – this time potentially involving 18,000 layoffs that could see the entire elimination of its equity sales and trading division – it was clear that we needed to return to the topic. Luckily, we’ve learned a few new tricks in the year since we last wrote of DB. So, what follows are a few of the clues that the US broker-dealer, Deutsche Bank Securities, Inc. (DBSI) had been displaying in plain sight all along, prior to this latest announcement; clues that the most recent radical transformation news was potentially in the offing for quite some time.
And, while it will be fascinating someday to compare what we have discovered in DBSI with other US broker-dealers like that of Goldman Sachs, Morgan Stanley, UBS or JPMorganChase, the current findings are plenty illuminating on their own. Remember, in the decade leading up to the Global Financial Crisis (GFC), DB had designs on becoming a global markets powerhouse. This meant a much stronger presence in US trading circles.
The fruits of these designs are symbolized in the growth in total assets of DBSI through 2007, peaking at nearly $520 billion for that year. However, as of 2008, total assets were cut in half (as was the case with most trading firms at this time) and the decline eventually continued to arrive at the lowest point in the 18-year time series in 2018 at less than $91 billion (see below):
Alphacution believes that this long-term decline in total broker-dealer assets was at least among a number of clues that would have led to the expectation that DB was in the midst of an ongoing struggle and that further restructurings might be necessary.
Now, with a broker-dealer operation, the trading book is hedged to some degree to minimize risks. However, when a large bank-owned broker-dealer is engaged in exotic (or, non-vanilla) securities, like certain asset-backed securities, it can be very difficult to hedge with precision or tight neutralities. This phenomenon can be seen in the chart below, which sets up our closing point about DB’s equities business – and the decision they are in the process of making to shutter it…
Cash equities trading is embedded in the long and short sides of DBSI’s overall balance sheet(that mainly includes fixed income securities). The chart below illustrates both the gross (sum of long and short sides) and net (net of long and short sides) cash equities components of the total book. Here, we can see the long term decline in gross values in equities and the declining risk appetite as seen in the net values remaining close to zero for the past 5 – 6 years:
Given all this, we wonder: Could we have seen this latest announcement by DB coming any more clearly? And, moreover, is Deutsche Bank a market macro-structure canary for something larger and more consequential happening in global markets?
Now, maybe this is a silly question with an obvious answer. Everyone knows that it’s increasingly difficult to make a buck brokering vanilla securities like cash equities. And, everyone knows that those who wield technology better than the rest are well-positioned to harvest whatever fees or spreads remain, no matter how tight things get.
Our look at DBSI here today is Alphacution’s first step towards quantifying the ongoing battle between and among bank and non-bank market makers and broker-dealers which will ultimately lead us to develop a more predictive ranking of the likely winners and losers at the center of modern global markets.
Watch this space…
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