While Deutsche Bank CEO John Cryan's push to restore the German lender's long-suffering investment banking unit has garnered most of the headlines about his tenure, as he's slashed jobs and cut costs in every corner of the business, the bank's dismal trading business has been the biggest contributor to its declining revenues.
The bank's equities trading unit, in particular, has suffered an embarrassing pullback in revenue, retreating nearly 40% over the past two years. Beset by the infamous Russian "mirror trading" scandal, fleeing clients, managerial turnover and the artificial placidity of post-crisis markets, revenue from stock trading is 39% lower today than it was two years ago, according to Bloomberg.
On top of that, banks are still coping with the fallout from MiFid II...
So, in what appears to be a last-ditch push (for Cryan) to revive Wall Street's worst-hit equities unit, the bank has hired Peter Selman out of retirement. the former Goldman partner, who joined the German lender in November, is embracing a unique strategy: Instead of poaching expensive rivals from large rivals, Selman is focusing on hiring students just out of college, from a variety of educational backgrounds, according to Bloomberg
As we noted earlier this month when DB released its Q4 results, revenues from equities and fixed-income trading were even worse than expected as overall trading revenue 27%.
That's why DB's shares have trailed every other major European bank over the past year.
Selman's approach makes sense: The bank has little control on volatility, and other market conditions which impact trading revenues. But at the very least, he can keep costs down by trying to selectively hire the smartest young people he can find and coach them well. Maybe in a few years, the franchise will start to recover.
“We certainly have holes to fill and we’re hiring,” Selman, an ex-Goldman Sachs Group Inc. partner who joined the German lender in November, said in a phone interview. “But we’re going to focus a lot on graduate recruiting. I don’t think the path forward is one where we make a lot of very high-priced, expensive lateral hires.”
Selman, 45, will need all the help he can get as he seeks to revive a stocks unit where revenue has fallen for 10 quarters in a row, leaving it 39 percent smaller than it was two years ago. The division has struggled with management changes, a lack of volatility in markets and fears over Deutsche Bank’s stability that prompted some clients to go elsewhere in 2016. New European rules that effectively force banks to charge for research separately from broking services aren’t helping.
Concerns about the scale of the challenge, which mirrors that at the overall investment bank and is complicated by renewed scrutiny of Deutsche Bank’s expenses, are reflected in a share price performance that’s dead last among European banks in the past year. Yet Selman, who joined in November, is optimistic that this year will mark the turning point.
“I am focused on growing revenue and prudently managing expenses to improve profitability,” Selman said. “I think 2018 will be a lot better than 2017.”
The division overseen by Selman deals in stocks and equity derivatives, as well as a prime brokerage unit that services hedge fund clients. Revenue from equities trading was 2.1 billion euros ($2.6 billion) in 2017, about 8% of Deutsche Bank’s total.
Another obstacle for Selman is the legacy of the September 2016 panic when reports that hedge funds were withdrawing excess cash from the bank's prime brokerage unit sent DB shares tumbling to all-time lows. Worries about the lender's derivatives exposure persist to this day.
This relates to why Cryan and DB's other top execs believe Selman is uniquely suited for the job: because cash-equity trading is moving away from banks, they're hoping Selman's background in equity derivatives will help bolster that business, which they believe has a higher growth potential.
Of course, DB's persistent track record of criminality - including an incident over the summer where it violated the Volcker rule and the terms of a prior settlement with US regulators by frontrunning its clients in an ultimately money-losing trade - is another obstacle for Selman in his quest to rebuild DB's client book.
To be sure, DB isn't the only major European bank that's placing its faith in the young. UBS recently said it'd be allocating more of its bonus pool to millennial employees to try and stop them from leaving for Silicon Valley.
But depending on the young also comes with one significant, undiversified risk: As we pointed out the other day, many have never experienced a crash, and thus they will be ill-prepared to react when volatility surges, as it did last week.
Of course, Selman has been out of the game for a little while now. While his plan to hire millennials certainly makes sense on paper, maybe he'll reconsider after finding himself in a room with members of history's most entitled generation...