Share

Deutsche Bank’s worst trading quarter in years fuels concern

London - Deutsche Bank chief executive officer John Cryan, who has settled regulatory probes, bolstered controls and cut billions of dollars of unwanted assets since taking charge, has another problem: making money.

Revenue at Deutsche Bank’s trading unit missed analysts’ fourth-quarter estimates and slumped to the lowest market share since the financial crisis as Cryan cut assets and clients pulled back.

Shares in the Frankfurt-based lender fell the most since September as analysts questioned the prospects of the division, the firm’s biggest revenue generator.

The quandary goes to the heart of the challenge that Cryan has faced since replacing Anshu Jain at the helm of Deutsche Bank in 2015. While the CEO is shrinking the trading unit and improving compliance to reassure investors of the lender’s financial strength, taking less risk can mean losing clients and making less profit.

"Deutsche Bank has lost market share in investment banking," said Helmut Hipper, a fund manager at Union Investment, a top 25 investor in Deutsche Bank.

"The question is, how can the unit return to profitability now that it is shedding assets and Deutsche Bank is cutting bonuses."

The stock rose 1.6% to €18.48 as of 10:06 in Frankfurt on Friday, recouping some of the 5.2% slide the previous day. Deutsche Bank has gained 25% in the past 12 months.

Fourth-quarter debt-trading revenue rose 11% to €1.38bn, falling well short of the 43% jump that the five biggest Wall Street banks collectively posted.

Equity-trading revenue, which analysts had expected to be flat, fell 23%, partly as hedge funds spooked by the bank’s legal woes went elsewhere. That business is still “flattish to slightly down” in January compared with a year earlier, Deutsche Bank Chief Financial Officer Marcus Schenck said on Thursday on a call with analysts.

Franchise damage

The global markets unit’s revenue fell 14% to €9.29bn last year from a year earlier. About €400m of the decline came from the company’s decision to exit certain countries and business segments, while slightly more than 50% of the remaining drop "is what we think is Deutsche Bank-idiosyncratic noise," Schenck said.

"The franchise is definitely damaged but they had to damage it to get through the next couple of years," said Oliver Rolfe, managing director at Spartan Partnership, a London-based recruiter that focuses on equities trading.

"If they can reset themselves within the next twenty-four months, they have the opportunity to return to their former glories down the line."

Other banks have recovered from temporary hits to their client franchises.

In the second quarter of 2012, Morgan Stanley suffered a bigger drop in fixed-income revenue than rivals as the bank said clients halted some trading with the firm amid a Moody’s Investors Service review of its credit rating that quarter, which resulted in a downgrade.

The bank said clients later returned, and it posted a 50% jump in bond trading revenue in the second quarter of 2013.

Capital boost

Deustche Bank had an 11% share of fixed-income trading and 6% in equities among the seven major investment banks that have reported fourth-quarter results so far. That’s the lowest share in each of those businesses since at least 2009, according to data from Bloomberg Intelligence.

Cryan boosted Deutsche Bank’s common equity Tier 1 ratio, a key measure of financial strength, to 11.9% in the fourth quarter as he cut risk-weighted assets by the most since he took over. Still, this prompted analysts to wonder how the lender can turn a profit while shrinking.

“We welcome the improvement in the capital position, but wonder if this has come at a cost to the profitability of the core franchise,” Andrew Coombs, an analyst with Citigroup who has a sell rating on Deutsche Bank shares, wrote in a note to clients.

Strong 2017

Deutsche Bank executives tried to address this concern by highlighting a strong start to 2017. The firm’s debt-trading business saw a 40% increase in January compared with a year earlier, Schenck said at a press conference after the results.

The capital ratio will probably move lower in the first quarter because the bank was being more active with clients, Schenck said.

“I’d still expect them to lose market share against their US competitors over time,” said Piers Brown, an analyst with Macquarie Group who recommends investors sell the stock.

“The key problem is the low return on equity. Rectifying this requires becoming a lot more cost efficient which may not be possible without scaling the business up. However, this requires capital which they haven’t got.”

Cryan said he expects Deutsche Bank to make a profit for 2017, which would be its first positive year since 2014.

“The fourth quarter was arguably maybe the most difficult quarter in almost a decade for us, given all the noise around the bank,” Schenck said in an interview with Bloomberg Television.

“That took its toll on our performance, particularly in our markets business.”

Read Fin24's top stories trending on Twitter:

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
19.09
-1.0%
Rand - Pound
24.05
-0.7%
Rand - Euro
20.58
-0.5%
Rand - Aus dollar
12.39
-0.3%
Rand - Yen
0.13
-0.9%
Platinum
894.64
-0.3%
Palladium
992.99
-0.9%
Gold
2,197.50
+0.1%
Silver
24.44
-0.8%
Brent Crude
86.09
-0.2%
Top 40
67,880
+0.3%
All Share
74,091
+0.3%
Resource 10
56,315
+1.2%
Industrial 25
103,611
+0.3%
Financial 15
16,459
-0.4%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders