TRADING TROUBLES

Deutsche Bank’s Strong Point Turns Weak

DB Wall Street - dpa-picture alliance Markus Ulmer
Wall Street isn't bringing in the big cash for Deutsche Bank like it used to.
  • Why it matters

    Why it matters

    Deutsche Bank’s investment banking returns look set to collapse, making its challenging restructuring even harder.

  • Facts

    Facts

    • Trading revenue of €10.5 billion represented almost one third of Deutsche Bank’s entire turnover last year.
    • Deutsche may face a drop in trading turnover of as much 46 percent for the first three months of 2016.
    • Research suggests the bank this year dropped from 3rd to 5th place among global investment banks ranked by size.
  • Audio

    Audio

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Trading has long been Deutsche Bank’s crown jewel. A strong business in stocks, bonds, debt and derivatives was what catapulted Germany’s storied financial firm into the ranks of the world’s top investment banks over the course of the 1990s.

Even the financial crisis didn’t stop Deutsche Bank from turning a profit in this sector. In the past year, trading brought in revenues of €10.5 billion ($12 billion), almost one third of the bank’s entire turnover. The lion’s share of that revenue, €7.4 billion, came from trading in stocks, currency and derivatives.

But now the jewel is looking quite damaged. Results have been poor across the entire global trading sector, but Deutsche Bank has been particularly badly hit. That’s partly because it is in the middle of an expensive and exhausting restructuring process.

It may be 2018 before banks like Deutsche Bank, Barclays and Credit Suisse start to make substantial trading returns, Morgan Stanley expects.

The global downturn has been rough. Early in 2016, ultra-low interest rates and fears of a slowdown in the global economy served to frighten away investors. Strict regulation has added to the banking sector’s woes and played particular havoc with fixed-income securities, a traditional strength of Deutsche Bank.

Huw van Steenis, an analyst with Morgan Stanley, fears it will take years for European investment banks to adjust to these hard new realities. It will be 2018 at least, he said, before banks like Deutsche Bank, Barclays and Credit Suisse start to make substantial trading returns.

Across the sector as a whole, analysts predict an average 25-percent fall in trading revenues for the first quarter of 2016. Morgan Stanley estimates that Deutsche’s trading turnover could fall by as much as 46 percent for the first three months of the year. In the same period last year, the bank’s financial trading business brought in revenues of €3.6 billion.

Deutsche’s hit will be an even heavier loss than its European rivals: Morgan Stanley’s research team think Credit Suisse is looking at a fall of 37 percent, while Barclays could lose 29 percent.

John Cryan, co-chief executive of Deutsche Bank, has already warned investors of weak quarterly results, and even the possibility of a small loss over the year as a whole. The slump in trading is not only due to poor market conditions. The bank’s restructuring is another major factor. Last October, Mr. Cryan announced that Deutsche planned to rationalize its dealings in credit default swaps, certain mortgage securities and the bond business.

In addition, the bank plans to cut ties to some customers, and to pull out of 10 markets worldwide. As it now stands, Mr. Cryan’s plan foresees €28 billion of shrinkage in risk-weighted investment banking assets, corresponding to an overall reduction of 15 percent.

 

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It was clear from early on that the restructuring would cost market share, a bank insider told Handelsblatt.

“It is no surprise. It reflects the change in strategy, which will mean we will increasingly focus on high-value service provision for a smaller group of customers, as well as a stronger, more concentrated range of products,” said the source, who declined to be named.

JP Morgan analysts identified another reason for Deutsche’s weak performance in this area: In February, the bank’s stock price fell to a record low. There were even some creeping doubts about the bank’s solvency, meaning that risk premiums for credit default swaps, a form of insurance against default, went through the roof.

“Cryan’s restructuring still hasn’t got under way, so it is still unclear who is going to be hardest hit.”

Unnamed banker, Deutsche Bank

Some investors wondered whether the bank would be able to make payments on its riskiest bonds, the so-called CoCo bonds, also known as contingent convertible bonds, prompting an unusual assurance from Mr. Cryan himself. Although JP Morgan also sees these investor fears as groundless, it notes that the turbulence likely scared off customers.

Daniele Brupbacher, an analyst at UBS, fears that the quarterly bottom line across the bank as a whole will see a fall of €2.6 billion, 20 percent down on last year. This is all disturbing news for investors, as well as for investment bankers and traders within the company.

“Mr. Cryan’s restructuring still hasn’t got under way, so it is still unclear who is going to be hardest hit,” complained one bank insider. Uncertainty is eating away at motivation, he said.

New rankings published by the financial research firm Coalition will not brighten the mood within the company. These show Deutsche Bank falling from third to fifth in rankings of global investment banks by size, according to the Financial Times.

 

Laura De La Motte is an editor at the Handelsblatt finance desk and a specialist banking correspondent. Michael Maisch is the deputy chief of Handelsblatt’s finance desk in Frankfurt am Main. To contact the authors: delamotte@handelsblatt.com and maisch@handelsblatt.com.

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