Deutsche Bank AG (DBK) outperformed UBS AG (UBSN) and Barclays Plc (BARC) in securities sales in the third quarter as it sought to shrug off Europe’s debt crisis and remain one of the top three global investment banks.
Europe’s biggest bank was hired for 5.8 percent of the $1 trillion of stock and corporate bond offerings in the three months through September compared with 4.3 percent a year earlier, data compiled by Bloomberg Industries show. That may help the Frankfurt-based lender boost its share of investment banking revenue among the world’s largest banks for the first time in a year when it reports earnings tomorrow.
“Deutsche Bank suffered more than other firms with the crisis closer to its home markets, but they’re also better positioned than peers to profit from the rebound,” said Dirk Becker, an analyst with Kepler Capital Markets in Frankfurt, who recommends investors buy the shares. “Hanging on to their position as a top global investment bank is crucial to maintaining profits.”
European Central Bank President Mario Draghi helped prompt a surge in sales of securities in the third quarter after pledging in August to conduct bond purchases to prop up some euro-region countries. An increase in such business is key for Deutsche Bank, which earned 45 percent of its income from investment banking last year.
The German bank, which saw revenue at the investment bank slide 11 percent to 3.5 billion euros ($4.5 billion) in the second quarter from a year earlier, probably profited from a higher volume of issuance as it battled for business with peers.
Deutsche Bank’s 1.5 percentage point gain in the share of volume of debt and equity offerings was second only to JPMorgan Chase & Co. (JPM)’s 2.3 percentage point jump among the nine biggest banks and compared with a 1.1 percentage point slide at UBS and 0.1 percentage point decline at Barclays, the data show. Morgan Stanley (MS), UniCredit SpA (UCG) and Nomura Holdings Inc. also saw their portion of the market decline, according to the data.
Armin Niedermeier, a spokesman for Deutsche Bank, declined to comment on the firm’s performance in the third quarter before the publication of its results tomorrow. Stephanie Aneto, a UBS spokeswoman in London, and Jon Laycock at Barclays also declined to comment.
Deutsche Bank may almost double revenue from debt sales to 331 million euros and boost income from equity issuance 40 percent to 95 million euros in the third-quarter, according to the average estimate of four analysts surveyed by Bloomberg. That may help the lender offset a decline in profit brought on by higher costs.
Investor demand for stocks and bonds has increased after Draghi said Sept. 6 that policy makers agreed to an unlimited bond-purchase program provided countries sign up to budget consolidation measures first. While no state has asked to tap that aid, Spanish and Italian 10-year bond yields have since declined to seven-month intraday lows in October.
Deutsche Bank’s market share of foreign exchange trading also rose in the third quarter, according to a person familiar with the business who declined to be identified because the information is private.
The lender’s share of a total $40.1 billion of revenue among the top 10 investment banks had decreased to 11 percent in the three months through June from 12 percent in the same period a year earlier, the data compiled by Bloomberg Industries show. That was the third-straight annual decline while Barclays increased its portion on a yearly basis in the first two quarters of 2012, according to the data.
Hurt by Europe
Banks that rely more on Europe have been hit hardest by the sovereign debt crisis. Investment banking fees in Europe, the Middle East and Africa may fall 22 percent to $17.7 billion this year, more than the 9 percent slide for global fees, data from research firm Freeman & Co. show.
Deutsche Bank’s offices in EMEA accounted for more than 70 percent of its 33.2 billion euros in revenue last year, company filings show. UBS got 52 percent of 27.8 billion Swiss francs ($29.8 billion) in operating income in Europe in 2011 while Barclays generated 57 percent of its 28.5 billion pounds ($45.9 billion) of revenue there.
Net income at Deutsche Bank probably fell an annual 15 percent to 613 million euros in the third quarter, according to the average estimate of nine analysts surveyed by Bloomberg. Profit at UBS, which also reports tomorrow, may slide 51 percent to 495 million francs, while Barclays may say on Oct. 31 that net income dropped 60 percent to 463 million pounds, estimates compiled by Bloomberg show.
The cost of shedding jobs and offloading riskier assets is hurting Deutsche Bank’s earnings. The lender said July 31 that it would trim its workforce by 1,900 positions, or almost 2 percent of staff, in a bid to boost profitability.
While Deutsche Bank’s third-quarter performance was “solid, particularly in the investment bank,” costs from job cuts and asset reduction require “upfront pain,” co-Chief Executive Officer Anshu Jain, 49, said at an investor conference in London on Sept. 25.
Deutsche Bank probably took 240 million euros of restructuring charges and 69 million euros in costs for reducing risk-weighted assets in the third quarter, Credit Suisse (CSGN) analysts including Amit Goel in London wrote in an e-mailed report to investors on Oct. 23.
In September, Deutsche Bank said it faced 500 million euros in costs and revenue losses from shedding assets through the end of March next year.
Debt issuance has “been pretty robust” and “we’ve actually had the best summer for five years,” Robert Rankin, who runs Deutsche Bank’s investment bank together with Colin Fan, told analysts on Sept. 12 in Frankfurt.
The firm managed the sale of shares in German chemicals distributor Brenntag AG (BNR) and counted French utility GDF Suez (GSZ) SA among the clients it sold bonds for in the three months through September, data compiled by Bloomberg show.
While fees from issuing debt and equity will buoy revenue, they’re typically dwarfed by trading for clients, making up 11 percent of the investment bank’s total income in the second quarter, company filings show.
Traders at Deutsche Bank may not have been fully positioned to profit from a rebound in markets in the last quarter as they focused on preparing for Basel III capital rules, said Andreas Plaesier, an analyst at M.M. Warburg.
“They were reducing risk,” said Plaesier, who is based in Hamburg and recommends investors buy Deutsche Bank shares. “They didn’t necessarily bet on a market recovery.”
Deutsche Bank, Europe’s largest bank by assets, is rated buy by 17 analysts, sell by 11 and hold by 16, according to data compiled by Bloomberg. The stock will probably trade at 35.07 euros in 12 months, a 5.6 percent increase from its price at 10:56 a.m. in Frankfurt today, according to the average estimate of 34 analysts. The shares have climbed 13 percent this year, more than the 4.2 percent advance for the 28-company Euro Stoxx Bank Index. (SX7E)
The firm hasn’t published a revenue target for its investment banking division. It places itself in the top three globally by compiling rankings using client market share, penetration or fees for different products and regions provided by external researchers, and its own estimates.
Deutsche Bank was in fifth place for investment banking revenue in the second quarter, behind JPMorgan, Goldman Sachs Group Inc. (GS), Citigroup Inc. (C) and Barclays, data compiled by Bloomberg show.
The bank is betting on clients turning to its securities unit, saying it expects competitors to retrench and investors to seek the counsel of the biggest banks amid uncertainty in financial markets.
“Investment banks with more mass are generally able to offer their services to clients at lower cost,” Plaesier said. “Getting back into the business if you give up your position would require a lot of time and money.”
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