Equities: Berenberg insists its ambitions are intact

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Berenberg will still reach its goal of becoming one of the biggest Transatlantic equities houses within five years, despite swingeing job cuts in its equities business, according to David Mortlock, head of investment banking at the German firm.

The Hamburg-based bank – also active in wealth and asset management – has rapidly built one of Europe’s biggest cash equities teams in recent years, turning heads with a strategy to grow outside Germany, especially in the UK and in large-cap stocks.

However, having more than doubled its analyst numbers since the beginning of this decade to around 130, Berenberg took the industry by surprise in early November when it revealed plans to “re-set equities headcount back to the beginning of 2017”.

This equates to a reduction in its equities staff of about 15%, with the largest cut (of 34 people) in research. Hardest hit are lower-rated analysts and thematic coverage.

David Mortlock,

Mortlock admits the cuts attract attention, as it “looked out of character” for Berenberg. But it would be “complete nonsense” to assume this constitutes a reversal of Berenberg’s UK and US strategy.

Ambitions outlined to Euromoney earlier in 2018 by Hendrik Riehmer, one of Berenberg’s two personally liable partners, remain in place.

“It’s difficult to do something like this slightly proactively without people making the wrong assumptions,” Mortlock insists. “People who think we are retrenching back to Germany will have to revisit that view. Nothing could be further from the truth.”

Disciplined profitability

In fact, the firm still plans to more than double its US analyst headcount to about 50 within the five-year period that Riehmer outlined to Euromoney, which would bring the global total to the approximately 150 analysts previously envisaged.

Similarly, it still aims to increase its UK stock coverage to about 500 by the early 2020s, from about 300 today. Its existing London-based team is sufficient to make about half of this increase in the UK; the firm will increase its UK stock coverage to about 375 next year.

In the US, the firm has won its first IPO global coordinator mandate for an upper mid-cap deal slated for early 2019, according to Mortlock. And Berenberg still plans to rival UK broker Numis by adding about 200 UK corporate broking mandates from about 30 today, thanks to its small- and mid-cap focus.

People who think we are retrenching back to Germany will have to revisit that view. … Nothing could be further from the truth. 

 – David Mortlock, Berenberg

“These are huge opportunities for us,” says Mortlock, pointing to its US equities and UK corporate broking businesses.

Berenberg first started growing rapidly after the 2008 crisis, taking advantage of job cuts at rival firms. By bolstering its profit margins now, it partly hopes to set itself up as a relatively attractive hirer in case of a more prolonged downturn.

“We want to be the people who are more disciplined at the other end of the cycle, to make sure that the profitability of the business is healthy,” says Mortlock. “We’ve built this great business, and we want to protect what we’ve built.”

Mifid impact

The recent cuts were the result of a four-month process to examine what research clients are prioritising and what they are less willing to pay for. The firm says it was a long-standing plan to sit down this autumn and take stock of the impact of the introduction of Mifid II in January on the business and the market.

The conclusion was that thematic research was nice to have, but less remunerative than stock-specific coverage.

The job cuts entail a reduction in the number of stocks Berenberg covers by about 100, although it has already initiated research on about 30 new stocks in recent weeks, bringing the total back to about 830.

Berenberg’s hiring spree is largely over in research and sales in Europe, yet Mortlock says the firm remains “one of the best-resourced equities businesses in the market”.  As such, Mifid II can still be an opportunity to “take more of a smaller pot”.

Mortlock expects Berenberg’s 2018 cash equities revenue to be slightly above 2017’s €115 million – although he says the overall revenue pool has shrunk by about a quarter.

He cites data from McLagan suggesting Berenberg is the biggest market-share gainer in European equities sales and trading commissions in 2018 to date.

Volatility in equities markets this autumn and a consequent issuance drought have affected the equity capital markets business. As a result, Mortlock expects a 20% fall in ECM revenue and deal numbers in 2018, although it will still be its “second-best year ever” in ECM, after the record it set in 2017.

Berenberg’s “high-quality equities business and solid balance sheet” will help it continue to win business as other equities houses struggle or get subsumed into biggest houses, including in the UK, Mortlock says.

“Compared to businesses that look like they might consolidate, it helps in corporate-broking pitches when you can say this is a 400-year-old institution,” he adds.