Deutsche Bank Looks to Shed Big Chunk of Wall Street Presence -- Update

By Jenny Strasburg and Telis Demos 

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 involve selling or transferring 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 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-formidable 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 loss-making, 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's 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 Officer 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 [e-mail] and Telis Demos at [e-mail]

(END) Dow Jones Newswires

July 02, 2019 14:16 ET (18:16 GMT)

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