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Deutsche’s new CIB disappoints
April 27, 2017 / 11:29 AM / 8 months ago

Deutsche’s new CIB disappoints

LONDON, April 27 (IFR) - Deutsche Bank’s debt trading arm underperformed US rivals in the first quarter of the year, producing an 11% rise in revenues to €2.29bn, which was below the 22% average increase that competitors achieved.

FX was singled out as a weak spot compared with rates and credit trading.

Still, chief executive John Cryan was optimistic that clients scared off in the final quarter of 2016 by the bank’s capital uncertainties had started to return in the prime brokerage space. However, the overall equities trading figures for the first quarter were still 10% down year-on-year at €674m, worse than the broadly flat revenues that US houses reported.

“Revenues especially in global markets were below expectations as well as underperforming US peers,” said Kian Abouhossein, analyst at JP Morgan. “We are rather disappointed. This should normally be the best quarter in terms of revenue performance and markets conditions were solid.”

“Our prime finance business began to recover from a tough fourth quarter,” said Cryan. “Client engagement is strong, asset flows are returning across the bank and activity is picking up. Our cost-cutting efforts are starting to pay off, while we have reduced complexity significantly.”

Deutsche is rolling its global markets’ businesses into its corporate and investment bank so the secondary trading activities can sit alongside the primary and advisory bankers. The latter activity was disappointing too, with revenues down fractionally at €1.81bn.

The bulk of the current CIB consists of transaction banking. Here revenues dropped 5% to €1.05bn as the bank pulled out of funding institutional cash business in particular in certain geographies such as Latin America, where it now only retains a presence in Brazil.

Like its peers, Deutsche experienced a strong revival in equity capital markets and debt capital markets underwriting, compared with the very quiet period a year ago. DCM revenues rose by a third year-on-year to €390m and ECM bounced back, up more than double to €153m as Deutsche advised Snap on its IPO and UniCredit on its €13bn rights issue.

Advisory remained tough for the bank, with fees down 24% at €114m. Quarterly revenues are lumpy in this area but they would have been far worse if the US$7.8bn divestments by AB InBev of SAB Miller’s breweries in central and Eastern Europe to Asahi had not completed on March 30. Deutsche advised InBev alongside Lazard on these deals.

The bank has seen departures in recent months in this and other parts of its CIB where it wants to expand, not helped by changes in bonus policies.

Cryan said the pipeline of deals was strong, indicating he will not deviate from his new strategy, laid out in March, to make both sides of the newly merged investment bank work together for existing Deutsche clients, rather than focusing on selling products to new clients. A major deal is the proposed €4.1bn sale of German pharma group Stada to Bain and Cinven.

However, in order to bolster its capital position in the wake of its US$7.2bn penalty from the US Department of Justice for misleading investors over residential mortgage-backed securities, as well as other settlements, the bank had to raise €8bn from shareholders.

The capital raise was completed in early April and gives the bank a common equity Tier 1 ratio of 14.1%, based on €358bn of risk-weighted assets at the end of March. But analysts are concerned this will dilute earnings and returns that the bank can achieve. The group is now retaining the low-margin Postbank.

Deutsche is also planning to raise €2bn from the partial IPO of its asset management business within two years. However, this is its most profitable arm and the bank, like Credit Suisse with its Swiss Universal Bank, has not ruled out keeping the division and raising funds via alternative means.

Group revenues fell 9% to €7.3bn, primarily because of more than €700m of negative credit valuation adjustments compared with a year earlier.

The bank’s shares fell €0.53, or 3.1%, on Thursday morning to €16.80. (Reporting by Christopher Spink)

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