Deutsche Bank Vowed to Defend Debt Trading. Here’s What’s Left

2018-07-27 11:05:29.329 GMT 
By Steven Arons      

(Bloomberg) — As Deutsche Bank AG tries to figure out what kind of lender it wants to be once all the cutting is done, Chief Executive Officer Christian Sewing is pinning hopes on the debt trading franchise.      Germany’s largest lender on Wednesday vowed to “maintain” its place as the world’s fourth-largest trader of fixed income and currencies, pushing back against calls for a more radical restructuring. The unit is still the biggest contributor of income to the investment bank, but it has been hit by a series of failed turnaround plans.      

Here are a few charts showing what’s left of the once- mighty operation.      

The business this week reported its weakest second-quarter since the financial crisis. Part of that was intentional as the bank announced in May it will pare back its U.S. rates business, which is part of the debt-trading unit. Those cuts have been now been largely completed, Sewing suggested. Chief Financial Officer James von Moltke estimated that trimming the U.S. rates business will cost the bank about 150 million euros in foregone revenue annually.      

Investment banking head Garth Ritchie, in a memo to staff, also attributed the shrinkage to the bank’s decision, made several years ago, to exit commodities trading. The bank’s fixed-income trading performance would have been comparable with peers if adjusted for that effect, Ritchie said. Banks traditionally report debt trading revenue as income from trading fixed income, currencies and commodities, generally abbreviated as FICC; Deutsche Bank instead reports “FIC income” to indicate its exit from commodities trading.      

In a year-over-year comparison, revenue from debt trading fell 17 percent, compared with gains at the largest U.S. investment banks as they benefited from rising commodities. Both Sewing and Moltke emphasized that a faster-than-expected reduction in leverage exposure — a measure of risk — in some parts of the investment bank would allow them to allocate capital for other purposes, including growing fixed-income trading.      

Deutsche Bank is “coming from a very material and good capital base, and we will redeploy part of that in order to grow the core business, in particular also in the FIC business,” Sewing said on a call with analysts. “We have very good revenue opportunities there.”      

The second-quarter contraction left Deutsche Bank with smaller share of FICC trading revenue than most of its U.S. peers. Figures excluding commodities weren’t available.      

With commodities trading gone and the rates business curtailed, the bank is seeking to grow foreign exchange and credit business lines, according to a presentation last month. It’s planning to maintain its rates business outside the U.S. at a stable level.      

For the full year, Deutsche Bank currently expects revenue from debt trading to be “slightly lower.” In a presentation last month it predicted a rebound by 2019 above the 2017 level as the overall revenue pool grows, though Deutsche Bank’s share in that pool will remain largely unchanged. 

–With assistance from William Canny.  To contact the reporter on this story: Steven Arons in Frankfurt at [email protected] To contact the editors responsible for this story: Dale Crofts at [email protected] Christian Baumgaertel