German banks set to pull out of small caps

UK brokers prepare to move in as Deutsche and WestLB slash their operations

The two German heavyweights Deutsche Bank and WestLB are on the verge of giving up their entire interest in UK smaller companies, say City sources.

Listed British companies and traders throughout the Square Mile are braced for a sudden exit from UK small-cap broking by the two banks, as investment houses everywhere slash costs and focus on more lucrative parts of their businesses. The same sources also warned that other City institutions might join the exodus from small caps, which could result in the closure of a number of regional offices.

Deutsche Bank, which after job cuts last week has just four small-cap analysts, is expected to continue winding down both its research and sales forces for UK smaller companies in the coming days. With WestLB, which bought leading broker Panmure Gordon, the process could be even more dramatic. The company is understood to be on the brink of a strategic review that could see not only a sharp reduction in small-cap broking, but a final decision to move most of its equity operations out of London altogether.

Spokesmen for both groups said they were not aware of any specific plans to target the small-cap operations, but both acknowledged that the current market environment is forcing management to keep a constant eye on both cross-border and cross-sector efficiencies. In June, Deutsche unveiled plans to cut 14,500 jobs from across its businesses, and that programme has not yet run its full course.

But a Deutsche source, who did not want to be named, said it seemed "more than likely" that management in Frankfurt will soon decide that UK small-cap broking should be wound down. "For a bank like this, the decision will come down to a simple matter of which parts are producing and which aren't," the source said.

"If you look at the market in its current state, investors are only interested in the big stocks that they can get into and out of fast. UK small caps are no longer where the action is."

That view is supported by several small-cap clients of Deutsche Bank, who tell of meetings where they were left in no doubt that Deutsche could shortly withdraw analyst coverage and market-making

If Deutsche and WestLB do leave the small-cap field, it will leave potentially rich pickings for the handful of surviving smaller houses that specialise in those stocks. Terry Smith, chief executive of rival broker Collins Stewart, is convinced that the big banks are on the verge of closing their small-cap operations, and is now actively involved in seeking new business from clients which are looking to change broker.

"Yes, we have people working on pitches right now," he said. "Clearly if these bigger banks are pulling out, we'd be mad not to jump on these new clients."

The exit from UK small-cap broking would bring down the final curtain on several old names that are still part of the City's collective consciousness despite having been bought by larger banks. The WestLB UK business centres on what was once Panmure Gordon. Deutsche's UK arm was based around Morgan Grenfell and NatWest Markets.