Leaked memo shows how Deutsche Bank spared its research department, where bankers are bracing for brutal future

David Folkerts-Landau Deutsche

  • Deutsche Bank axed its derivatives and equities trading arms as
    part of massive job cuts but left its research function relatively
    untouched, and a memo leaked by one of the bank’s hedge fund
    clients gives details on which jobs were spared.
  • Deutsche will not touch its fixed-income research team, while
    its US and European Union research units will have slight cuts to
    their sales teams, the memo says. 
  • Deutsche Bank’s decision to keep its research unit largely
    intact shocked insiders, sources say, since it has not historically
    had a strong reputation in that area. European regulations have
    also upended the research industry. 
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Deutsche Bank surprised insiders by sparing big parts of its
research division as it laid off tens of thousands of other workers
and dumped equities and derivatives trading entirely. A leaked memo
from one of the bank’s hedge fund clients seen by Business Insider
reveals the bank plans to hold on to huge swathes of the
division.  

“Deutche Bank management is focused on businesses with low risk
and [that are] operationally stable — research being one of those
businesses,” the memo said. 

In Europe, 95% of the research team will remain, the sales team
will be cut slightly “and their scope has been narrowed to only
sell/push research,” the memo said. For US research staff, 85% to
90% will stay on with a smaller sales team. The entire Asia
research business will shutter. 

Deutsche Bank had said it would keep an equity and macro
research capacity and a targeted equity sales force, but has not
publicly detailed how much of the teams would be spared.

Insiders at the bank said they were shocked by the decision to
focus on research. The move is especially notable given regulations
in Europe that have split the industry between elite players and
boutique firms. 

“We will continue to provide the high quality independent Macro,
Thematic, and Fixed Income Research for which DB is a known
industry leader,” a Deutsche Bank spokesman said in an email to
Business Insider. “Quantitative Investment Solutions will also
continue as will our primary research and data science work within
dbDIG.”

The Bank is also committed to providing extensive and
top-quality Company Research coverage for key sectors in Europe and
the US,” the spokesman said.

Read more:
Here’s why Deutsche Bank’s thousands of newly unemployed workers
have a tough road ahead

Exiting equity trading wasn’t a huge surprise, since trading
fees have been hammered by banks jostling for market share, and the
biggest banks have been pricing out mid-size rivals. But the
decision to keep research shocked insiders, a source told Business
Insider.  

Deutsche Bank isn’t known for its strong research, (at least if
you ask rival bank employees or consult various annual
rankings lists.)
And keeping equity capital markets, or ECM,
research
was especially surprising, insiders and a banker at a rival firm
said
, since the bank gutted its ECM trading arm. 

David Folkerts-Landau, chief economist and global head of
research, was one winner who kept his job and his empire at the
bank, an insider said. 

The research industry has been upended after European MiFID II
regulations kicked in last year. MiFID has squeezed smaller banks
by forcing them to charge separately for research and trading, with
the aim of boosting transparency for clients. That has caused those
lenders to focus on their top money makers and dump certain
business units, according to Greenwich Associates. 

Read more:
Deutsche Bank cut 18,000 staff. Rivals and Wall Street insiders say
it’s still not enough.

In theory, separating the payments removes the historically
relationship-driven decision over which bank to trade with. In
practice, fund manager wallets are shrinking to accommodate the
extra payments for research, and banks can in turn only afford to
keep top-tier analysts. Meanwhile, unhindered by ties to trading
fees,
more analysts have decided to strike out on their own
to start
boutiques.

“European midsize/regional brokers will continue to face
headwinds in this new regime and face a stark choice,” Greenwich’s
Richard Johnson said in a report in May. “Invest more in their
trading infrastructure to improve competitiveness” in their trading
units, “or pivot away from trading altogether to focus on their
core competency of research.”

Deutsche Bank’s share price has fallen 6% since the
restructuring kicked off on Monday, possibly indicating that
investors are wary of the decision to focus on research as a core
business. 

Read more:
A new machine-learning tool used by hedge funds to rank their
brokers hopes to put an end to the ‘old boys
network’


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Leaked memo shows how Deutsche Bank spared its research department, where bankers are bracing for brutal future