An odd little detail of Deutsche Bank’s restated historic earnings to take into account the firm’s new structure has revealed how much its equity capital markets business gained from the existence of the bank’s secondary equities franchise, which it is now exiting.
Deutsche, like many firms, operated ECM as a joint venture between investment banking and equities. For reporting purposes, however, it grouped ECM-related revenues as a single line in the management accounts, within the origination and advisory business. It meant that equities revenues that were related to ECM activity were reported within ECM rather than within equities.
Ahead of its third quarter earnings, which are due to be announced tomorrow (October 30), the bank on October 14 restated its historic accounts, going back to full-year 2017. The purpose, as with all similar restatements, was to present accounts that could be more easily compared with future earnings statements.
The restated accounts are organised according to the new structure, so corporate banking areas, including global transaction services, have been moved into the new corporate bank, while investment banking and capital markets businesses remain in a new investment bank division.
Historic revenues from the equities business have been moved into the capital release unit (CRU), a new unit that is housing franchises and assets that are being exited or sold.
That means that the bank has also had to restate its historic ECM revenues, stripping out that portion that was in fact generated by the equities business as it related to ECM activity.
I understand that at one point the bank even envisaged moving 100% of the ECM revenues into the CRU, which would have looked decidedly odd and might have run the risk of signalling a more calamitous fate for the ECM business. In the event it was decided to split out just certain portions of the revenues (see table).
The difference is instructive; in 2018 it means the loss of €178 million of revenues, roughly 50% of the total. In some quarters it means the loss of more than half of ECM revenues, the quarterly variation in the difference being down to the fact that not all ECM activity benefited from the same proportion of equities revenues.
Deutsche is still confident that it can offer a proper ECM service to clients, albeit with a more focused footprint. But in revenue terms it’s clearly going to be a lot smaller – and now we have a glimpse of just how much smaller.
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