Securities Trading

Deutsche Bank's Weak Core

trading room deutsche bank
Deutsche Bank's biggest bread-and-butter business -- securities trading -- is weak and losing money, according to new figures published by the bank. Some investors are starting to question whether more drastic cutbacks may be needed at Germany's largest financial institution.
  • Why it matters

    Why it matters

    New financial figures released by Deutsche Bank show its core securities trading business is failing, which could raise pressure on CEO John Cryan to speed up cuts and restructuring at the bank.

  • Facts

    Facts

    • Deutsche Bank released new financial figures giving a more detailed look into the profitability of specific businesses.
    • The figures showed that securities trading, usually a big and reliable source of income, lost €1.98 billion before taxes last year.
    • Some investors are calling on CEO John Cryan to cut deeper and faster at Deutsche Bank to revive the institution’s flagging share price.
  • Audio

    Audio

  • Pdf

Deutsche Bank in January shocked investors when it reported a record €6.8 billion ($7.8 billion) loss for 2015. But only this week did the bank crunch the figures to reveal a new, unsettling fact – securities trading, usually one of its most reliable sources of income, is struggling and losing lots of money.

The weak core was revealed by the release of new financial data that reflect one of the major restructuring moves made so far by its new designated chief executive, John Cryan. Mr. Cryan, a former UBS banker, split Deutsche Bank’s investment banking business into two — a securities trading business called Global Markets, and a consulting business, including trade finance and transactions, called Corporate and Investment Banking.

The new details show that securities trading is losing a lot of money. In three of four quarters in 2015, the business generated losses. By the end of 2015, it had posted a cumulative pretax loss of €1.98 billion.

It was particularly the legal fees and write-offs of €4.9 billion that brought overall figures down.

However, the operating business, too, lost out in the course of the year. The net income from the operations of Global Markets fell from €3.6 billion in the first quarter to €1.5 billion from October to December. In the fourth quarter of 2015, there would have been a loss of more than €500 million even without special items.

The trading business accounts for more than a third of all income at Deutsche Bank.

 

118 Deutsche Bank - WTB 2015 Neu 22 02 16-01

 

Mr. Cryan had already prepared investors for the weaknesses in the securities trading business would continue into the first months of this year. Analysts at Independent Research fear a significant decline in equities as well as bond trading in the first quarter. Aside from the poor environment for investment banking, Deutsche Bank’s problems are compounded by its own restructuring, such as the decision to end its credit-loss insurance business.

In light of these factors, analyst Markus Rießmann at Independent Research said the current price of Deutsche Bank’s share at €14 is justified. Since the beginning of the year, the bank’s share price has fallen by about a third.

Given these developments, big investors are starting to question the bank’s strategy. The situation is critical, said one big investor, who declined to be named. The bank needs to implement drastic measures faster than it has so far. Deutsche Bank probably needs to shrink further before it can grow again.

However, Mr. Cryan not only revamped the investment banking segment of the bank; the segment Deutsche Asset & Wealth Management is also being split off and combined with the private client segment businesses.

In the segment Asset Management, earnings before taxes (EBT) grew by 11 percent to €854 million in 2015. In the private client business including Wealth Management, but without the subsidiary Postbank, which Deutsche Bank will split off, the results showed a €778 million loss in the past year.

At Postbank, the losses amount to €2.6 billion because of high write-offs.

At the same time, Deutsche Bank seems to be dogged by a continuing series of costly frauds involving some of its current and ex-employees. According to financial sources, Deutsche Bank has suspended five employees in its asset management business — three in Geneva, Switzerland, and two in Frankfurt — pending an investigation into whether they violated the bank’s internal controls to enrich themselves.

The employees dealt with wealthy clients of the bank from the Middle East and the Persian Gulf states. Only the bank, not its clients, were apparently the victims of the fraud by employees, the sources said.

The bank is now conducting an internal investigation into the affair, sources said. In addition, Deutsche Bank has also reported the alleged crime to the Swiss financial regulator, Finma, the German financial regulator, BaFin, and to police in both countries. The bank declined to name the employees who had been suspended nor comment further on the situation.

Deutsche Bank’s shares were down 2 percent at 11 a.m. in Frankfurt at €13.88.

 

 

Michael Maisch is the deputy chief of Handelsblatt’s finance desk in Frankfurt am Main. To contact the author: maisch@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!