Deutsche Bank set to make big cuts to investment banking unit

Deutsche Bank's top management is set to decide against a complete exit from retail operations and instead opt spin off its Postbank business and make big cuts in its investment bank.

For the last few months, the bank's top brass have been considering how to boost returns in the face of tough new banking regulations and lacklustre markets, and had recently narrowed their range of five options down to two.

The first envisaged selling off Postbank, which Deutsche bought in stages from 2008, and cutting about €150bn of assets in Deutsche's investment banking division.

The second, more radical option, would have involved Deutsche splitting itself in to two legal entities: one containing its investment banking, asset and wealth management and global transaction banking divisions; the second containing both its Postbank and own-brand retail businesses, which would be fully merged and then listed.

Deutsche's management board is now set to recommend the former option to the supervisory board in a meeting on Friday, according to people familiar with the situation. This would be the most radical move co-chief executives Anshu Jain and Jurgen Fitschen have made since they took the helm at Germany's biggest lender in 2012.

Rather than seeking to become a "European Goldman Sachs", Deutsche's top executives see JPMorgan Chase as the rival with the closest model to its chosen strategy - combining investment banking with commercial lending and retail units.

The bank has been dissuaded from opting for a full exit from its retail business for at least four reasons. The first is the high execution risk of merging Postbank with its other retail operations and a concern that it would not achieve the expected synergies or exit price from an eventual flotation.

There are also questions about the ability of a standalone investment bank, deprived of the retail bank's deposits, to meet regulators' funding requirements. Such a pure-play investment bank could also suffer from a lack of earnings diversification. Finally, there are political and cross-selling advantages to keeping a high street banking presence that serves small business customers, according to people familiar with the situation.

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Although much of the cost cutting will be borne by Deutsche's retail business, the investment bank will not escape unscathed, with roughly €150bn of assets being shed to match the reduction of retail assets stemming from the Postbank sale. That is on the lower end of market expectations of between €150bn and €180bn of cuts.

The bank will achieve some of the reductions by substantially paring back its equity derivatives business, which has become very expensive to run under new capital rules.

Equity derivatives were until recently a key focus area for the bank, which had an 11.2 per cent market share in European options and a 9.7 per cent market share in US swaps in 2014, according to Greenwich Associates. Credit Suisse said that equity derivatives were one of its best performing areas in the first quarter of 2015, as market volatility drove activity.

Deutsche's repo business, government bonds and prime brokerage will also come under the microscope. However, the bank, which has been the largest fixed income operator in the US for five consecutive years, remains committed to serving a global market but will narrow the range of countries it is active in. At present, Deutsche's transaction services business is active in 49 countries, while the total Deutsche group operates across 71 countries.

Amid the cuts, however, Deutsche will also seek to to beef up the fee-earnings operations of its investment bank, which do not enjoy as strong a position globally as its trading business. This will entail a modest investment in its corporate finance and equity capital markets operations.

The supervisory board's approval is not a foregone conclusion, especially as half its members consist of labour representatives. Verdi, the trade union, whose chairman Frank Bsirske, sits on Deutsche's supervisory board, has warned that the debate over the future of Postbank is causing great concern among the bank's employees.

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