DB defends credit shake-up in face of staunch criticism
* Splits credit, rates sales but keeps trading integrated
* Tougher regulations blamed for slower revenues
* New model defended despite departures of credit traders
By Christopher Whittall
LONDON, Sept 13 (IFR) - Deutsche Bank's merger of its fixed income trading businesses has suffered widespread criticism following a series of high level departures and falling trading revenues.
The German bank has traditionally been one of the foremost players in credit trading, which it decided to hand over to executives from rates trading when the bank merged the two businesses in the second half of 2012.
To some this symbolised the downsizing of importance of credit in the eyes of senior management, and many outside the bank now question the logic of what they see as a failing strategy.
"They tried to merge credit and rates and it didn't work out. I think it's been a disaster. Most credit people have either gone or are looking to leave, it's really bad," said one credit market veteran with knowledge of Deutsche Bank's trading operations.
"It was not a merger of equals. The risk takers in rates thought they could understand credit very well. These are smart guys, but you don't learn a new business in six months. Since then it's been going south."
In what critics say is an admission of its error, DB has now separated sales for rates and credit, although trading remains combined. But senior officials within the bank defend the overall strategy and signal they will be staying the course.
"We have taken a bold new approach over the past year to merge the businesses within fixed income. We think that keeping asset classes separated is not the right choice and other investment banks will eventually follow this model," said Michele Foresti, head of European credit and rates at DB.
Despite sustaining heavy losses in the 2008 crisis, DB's credit trading business has long been considered among the best on the Street. When Anshu Jain was promoted to co-chief executive of the bank last year, it was the head of DB's credit business - Colin Fan - who was tapped to run global markets in the investment bank. The merger between credit and rates was announced shortly afterwards.
Some banks added trading of the more distressed government bonds to the credit business during the sovereign debt crisis, but refrained from a complete merger with rates, not least because of the different client bases of the two products.
DB's decision sparked a series of high level departures in the credit trading business. Antoine Cornut, who headed up US and European credit trading, left in July 2012 to set up his own hedge fund, followed by an exodus of other senior traders.
This included Bjoern Wiegelmann and Alexis Serero, head of index trading, to Citigroup, James Nowak to Goldman Sachs and Romain Rachidi to Morgan Stanley. Most recently, DB's European head of investment grade credit trading, Vassilis Paschopoulos, left after the firm merged this business with ABS trading.
Meanwhile, DB's sales and trading revenues for debt and other products for the first half of 2013 fell 13% versus the previous year to 4.6bn euros.
This compares with rising revenues at US banks. JP Morgan, for instance, saw its fixed income markets revenues increased by US$400m to US$8.8bn over the same period.
"My understanding is the move to merge credit and rates isn't working for Deutsche, particularly on flow," said a senior credit trader at another European bank, who has not worked for DB in the past. "But they continue to push hard."
There are a variety of reasons for those in DB's credit trading team to be disgruntled with the move. Once at the centre of one of the cash cows in investment banking, regulation has cut down the importance of credit traders in sellside banks.
The ban on proprietary trading and the pressure for banks to cut balance sheet has hit this capital-intensive business particularly hard. DB's move to re-mould credit trading lays testament to the changing landscape, and it could well end up being proved right.
"The credit industry has fundamentally changed since before the crisis with balance sheet becoming more constrained and a new regulatory world in place. In this new environment, different asset classes have become more correlated, information and technology will play a key role in serving our clients and models have to evolve," said Foresti.
"Our combined revenues in credit are strong - we maintain profitability. You need to maintain your cost base whenever you invest substantially in technology and infrastructure."
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