Deutsche admits it faces struggle to revive IPO business
Deutsche Bank faces an uphill battle to revive its struggling equity capital markets business, one of the bank’s top executives has admitted.
The German bank’s share of the market for advising European companies on initial public offerings, rights issues and other equity-related transactions plummeted to 1.5 per cent in the first seven months of the year, down from almost 5 per cent in 2018, according to Dealogic data.
“Our business is to a large degree driven by client perception,” Josef Ritter, Deutsche’s head of ECM Europe, the Middle East and Africa, told the Financial Times. “If a bank is perceived to get everything right all the time then it is much easier to win the next ECM deal.”
Christian Sewing, Deutsche’s chief executive, last month unveiled plans to cut 18,000 jobs and shrink the bank’s balance sheet as he refocuses Germany’s biggest lender on its domestic retail operations and the bread and butter of corporate banking in Europe.
The bank has vowed to hold onto its ECM business even as its closes down its European equities trading business. That plan has prompted scepticism from rival banks which claim that a trading and sales staff are critical to successfully managing an IPO for a company.
“I don’t think you can successfully run an ECM business without equities trading,” a senior London-based banker at large US investment bank said. Deutsche will lack “the finger on the pulse of the market” and hence will appear less attractive to clients.
Mr Ritter said Deutsche is retaining a “leaner and more focused” set of equity sales staff in specific areas where it thinks it has a competitive advantage or particular expertise, such as its European home market and higher-margin recapitalisation deal for struggling companies.
However, he acknowledged that “we have to explain a lot to clients and will need to convince with the quality of our work.” Revenues from the ECM business tumbled 35 per cent in the first half of the year to €118m from a year ago. Its slide down the European league tables for ECM has left Deutsche ranked 13th by revenue, trailing smaller non-European rivals such as Jefferies and Royal Bank of Canada.
Deutsche’s drop has been similarly steep in its domestic market. Its share of German ECM tumbled to 8.6 per cent in the first half of 2019, leaving it ranked fifth. Just six years ago, it was in the coveted top spot and controlled close to a quarter of the German market.
“A top-5 position in European ECM is unrealistic over the short term, but we definitely need to get back into the top 10,” said Mr Ritter.
Mr Ritter insisted the business can eventually overcome its current challenges, pointing to the successful €600m capital raise it led for German commercial real estate company Aroundtown a week after the lender announced the radical shrinkage of its investment bank.
Over the past decade, Deutsche was a lead manager on 29 of the total 99 IPOs on the Frankfurt Stock Exchange. Just over half the Deutsche-led IPOs have outshone the wider market — one of the best performances versus other ECM banks, according to a recent analysis of German finance trade publication Finanz-Szene.de.
So far, only around a fifth of Deutsche’s equity dealmakers have been cut, leaving it with a team of about two dozen in Europe, but many more traders and salespeople have been made redundant.
“Those who are staying on board can entirely focus on promoting transactions and marketing research,” said Mr Ritter. They will not have to take care of brokerage clients, equity derivative sales and other activities which have been exited, he added.
Deutsche also argues that the increasing degree of automation in equities trading means the bank processing the transactions no longer gets valuable insights into the market anymore, reducing the need for it to retain human traders and salespeople.
This year “60 per cent of all equities trading in Stoxx600 companies was processed through fully automated infrastructure systems”, said Mr Ritter.
Additional reporting from Philip Stafford.