Deutsche Bank weighs cuts to leveraged finance unit

Bloomberg

Deutsche Bank AG is weighing cuts to its leveraged finance unit as part of a review by Chief Executive Officer Christian Sewing into under-performing businesses as his three-year restructuring concludes.
The exercise is scheduled to finish next month and may result in less capital and other resources including staff being allocated to the business of providing loans to highly indebted companies. At the same time, resources may be redirected to other areas, including potentially the deals advisory business.
Both units are part of the origination & advisory division headed by Mark Fedorcik, which has struggled this year as companies shied away from deal-making and raising capital amid soaring inflation and geopolitical tension. Leveraged finance has been a sore spot across the industry, with volumes plunging, stuck deals causing billions in losses and regulators scrutinising the risk in those units.
Deutsche Bank’s leveraged finance business in the U.S. is down almost 80% compared with a year earlier. At the same time, Fedorcik is said to be confident of an uptick next year in deal advisory in areas including technology and healthcare.
“We regularly review our business portfolio as part of the normal course of management and business planning,” a spokesman for the German lender said, without commenting further. The current exercise is more comprehensive than usual, the people said.
Deutsche Bank has already cut dozens of jobs in origination and advisory, including leveraged finance, Bloomberg reported last month. The lender plans to continue to shed selected roles to rein in costs, though that also reflects a usual effort to fire low performers. The bank doesn’t envisage a sweeping job reduction program, according to the people.
Deutsche Bank’s leveraged finance business has long been a lucrative source of fees, and was a big driver of the firm’s €1.57 billion ($1.6 billion) in debt origination revenue last year.
Deutsche Bank used to be a top 10 firm in global M&A but has tumbled down the league tables to hit 38th place this year to date, according to data compiled by Bloomberg. The leveraged finance business is on course for its worst year in about a decade.
Sewing’s review will seek to lay the strategic groundwork for the next few years as the deep overhaul that he kicked off in mid-2019 comes to an end. It also includes other divisions, with each business head asked to assess which products, clients or regions to de-emphasize or strengthen. The plan is to shift capital to those businesses where Deutsche Bank can achieve the highest returns.
Surging revenue at the investment bank, in particular the trading unit, has been a key reason for the lender’s rising profitability and why Sewing’s current turnaround strategy is seen as largely successful. He has said he expects the division to contribute far less to revenue growth in the coming years.
The leveraged finance business is one that has caused tensions between lenders including Deutsche Bank and its key regulator, the European Central Bank. The ECB has already slapped Germany’s biggest bank with an extra capital requirement related to that business and has said it plans to do the same for other lenders on the continent.
Chief Financial Officer James von Moltke said last month that Deutsche Bank has deliberately slowed down leveraged lending this year given the market environment. He also labeled the business “a very important” one and said the bank “will stay” in it.
Sewing, in a speech at a Frankfurt conference on Friday, said that European regulation surrounding leveraged finance is making it harder for the continent’s banks to compete in that area.