Morning Coffee: Citigroup says “Nein Danke” to a Deutsche merger. And Goldman Sachs will take care of your relatives, young and old

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Once upon a time, the CEO of Deutsche Bank would always be asked at the end of media interviews about which struggling bulge-bracket franchise he might consider taking over.  Those days are gone, and now it’s Deutsche itself which is the perennial subject of speculation and denial.  In a wide ranging interview with Manager Magazin (German), Citigroup CEO Mike Corbat was forced to politely demur when asked about a Citi-Deutsche nuptial, suggesting that there was “too much overlap” with Citigroup’s existing business, and that mergers weren’t interesting when they were driven purely by costs.

It’s the mild and off-hand nature of the dismissal which is likely to sting the most in Frankfurt.  Putting it charitably, “too much overlap,” might refer to the global payments business of Deutsche, which does indeed overlap substantially with Citi’s, and the two banks are both big in rates and FX.  But the retail franchise?  The corporate lending business? The asset management brands? Even the investment banking and advisory businesses?  Subtly, Corbat seems to be indicating that the parts of Deutsche Bank which involve markets and franchises that Citigroup isn’t already in, aren’t really worth much.  That’s got to hurt.

And the statement that mere cost-cutting exercises don’t generate value is just as unpalatable a home truth when you look at Christian Sewing’s current strategy.  Deutsche has been trying to shrink its way to revenue growth for several consecutive quarters, and it doesn’t appear to be working.  The share price fell nearly 1.5% when the interview was released; this is hardly likely to have happened because the market had been holding out much hope for a Citigroup takeout.  It’s likely that people just looked at what Corbat said and saw what it implied for the business model.

The big problem at Deutsche was identified in a smart opinion piece in the Wall Street Journal. It still has a pre-crisis business model that’s completely dependent on being able to fund itself more cheaply than anyone else, and it no longer has that competitive advantage.  There are some signs that the problem is being gradually addressed, but until it is, it’s understandable that few other banks want to take on Deutsche’s many technical and regulatory problems.  After all, even at a knock down price like the 0.3x book value where the stock trades, the moment you sign the deal to acquire Deutsche, all of its issues become your fault, starting with the IT and systems issues which, as we noticed in yesterday’s Morning Coffee, caused them to lose $60m on a set of trades that were meant to reduce risk.

That doesn’t necessarily make Deutsche a bad place to work.  You can get pretty rich in a failing bank if you know what to do. Deutsche Bank has been handing out big packages to top people who try leaving this year, and it’s clear from the recruitment news that in sectors like healthcare that Deutsche has reached the point where it needs to make big hires to preserve the franchise, and is presumably paying up in order to do so.  But it is a fairly demoralising environment, and it can’t help to see your team regularly spurned by potential buyers, like the last croissant in the shop window.

Separately, when is a benefit not a benefit?  When it’s a “benefit” which conveys a strong and startling message about the kind of job in which something like that might be needed.  For example if you work in London, Goldman Sachs just made it a lot easier to miss your child’s school play or to keep on working while your child is sick or elderly parent is hospitalized after a fall. Following its earlier moves on fertility treatment and gender reassignment surgery, GS has now brought its “backup care programme” across the Atlantic, providing employees with twenty days per year of emergency backup care for children or elderly dependent relatives, at nominal cost.

Obviously, if your usual arrangements break down, it’s much better to have a service like this available than not to have it.  But on the other hand … the continental European offices don’t get this benefit yet, and that might be not so much a sign that they’re being short changed as a sign that they don’t need it.  If your child or parent gets sick or hurt, you might want to stay home yourself, or at least have the option to do so. If you have twenty days’ of subsidised emergency care, though, it’s likely that you’ll be expected to use it.  As a move aimed at retaining female staff and coping with work-life balance, this might raise some decidedly mixed emotions.

Meanwhile …

Autonomous Research selling to AllianceBernstein might raise hopes of a big payday for everyone in the research boutique industry.  But there aren’t many boutiques of the stature of Autonomous, and there aren’t many buyers like Bernstein to sell them to (Bloomberg)

On the other hand, Bob Diamond’s investment firm is buying 20% of Kepler Cheuvreux, which is not exactly a boutique but which makes a significant proportion of its revenue selling research for money.  He also suggested that Cheuvreux could co-operate with his recently acquired Panmure Gordon, and that his firm could “arbitrage regulations” in the insurance industry (FT)

The 1MDB scandal continues to get worse and worse, as evidence emerges that Jho Low, the alleged mastermind of the fraud, had a personal meeting with Lloyd Blankfein (New York Times)

While on trial in London for passing confidential information to a day trader, a former UBS compliance officer has admitted to telling “partial lies” (Bloomberg)

The period toward the year end seems to be quite active for senior moves; after Deutsche’s healthcare raids last week UBS has hired Romine Hakme from DBK to lead industrials sector coverage. Often, senior moves late in the year indicate either desperation at the hiring firm, or a likely bad bonus pool at the previous employer, or both (Financial News)

The political declaration in the Brexit agreement has no favourable surprises for the financial services industry; business will need to be done on an “equivalance” basis after all (WSJ)

Nomura’s credit rating is under review for a potential downgrade at Moody’s (Bloomberg)

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