This is why Deutsche isn't cutting its fixed income business, and why credit traders at Morgan Stanley, HSBC, Credit Suisse, BNP and RBS should all be fearful
Stefan Krause, Deutsche's CFO, faced the inevitable question this morning: in light of events at UBS, why isn't Deutsche heavily curtailing its fixed income business too?
The questioner pointed out that under Basel III, FICC is the lowest ROE-generative business around. UBS is targeting a 15% ROE by getting rid of most of its FICC business, so what makes Deutsche's operation so different?
How come Deutsche can make a 15% ROE with a large fixed income business when others can't?
Deutsche, the market leader
Krause's response was predictable: Deutsche is a market leader; UBS wasn't.
"The economics of Basel III make it very difficult to achieve adequate returns when you have a mid or low tier market share," he said. "We are a market leader. We have scale and we believe we can make money in this. The investments in our platform to achieve target returns under Basel III are substantial, but if a competitor doesn't start from the same platform it will be harder for them to make a decent return."
Deutsche's strength in fixed income was highlighted by Anshu Jain in an investor presentation last year. In most fixed income businesses the bank ranks first, second, or third, said Jain. Its weakest showing was in commodities, where it ranked fourth or fifth.
UBS, Morgan Stanley, HSBC, Credit Suisse, BNP and RBS: the also-rans
Fundamentally, Deutsche thinks that it has the scale to make decent returns in fixed income sales and trading, even in the new capital-intensive environment. After hiring Rajeev Misra from Deutsche in 2009 and trying to build a fixed income business to compete with its German rival, UBS has belatedly decided that it doesn't.
The real issue is therefore this: if UBS can't make decent returns in fixed income due to a lack of scale, which other banks are in the same situation?
The following chart, produced by analysts at JPMorgan in March offers a few clues. If UBS lacked sufficient scale in fixed income, the same can be said for HSBC, Credit Suisse, BNP and RBS. Will these banks make big redundancies too?
Fixed income market shares:
McKinsey's recent report on banking clarifies which fixed income business areas are likely to struggle at banks without the necessary scale. If you work in flow rates, flow credit, structured rates, or structured credit at a bank without significant market share, it is time to be concerned.
McKinsey's new reality:
Not everyone at Deutsche Bank is safe
This is not to say that Deutsche is making no new redundancies. So far, the bank said it has made 1,200 of its intended 1,500 investment banking headcount reductions. It has also increased its overall intended job cuts by 93 people, to 1,993.
Once, this may have caused mild excitement, but in the light of 10,000 redundancies at UBS it's barely worth commenting upon.