• Trading government bonds `not very attractive,' co-CEO says
  • Cryan sees opportunity in high-yield, leveraged-finance units

Deutsche Bank AG’s path to higher returns in its trading business probably won’t be through dealing German bunds.

New rules on leverage mean Germany’s largest bank must embrace complex products and derivatives in order to earn sufficient returns on equity, co-Chief Executive Officer John Cryan said Tuesday at an investor conference in New York. While spreads for such securities have “repriced nicely” as fewer competitors are active, they require improvements to back-office functions and controls, he said.

“We’ve offered an ability to enter into complex trades, illiquid trades as a source of competitive advantage,” Cryan said. “There’s nothing wrong with that, if you have the ability to control it efficiently.”

The business of trading so-called cash rates products, such as government and agency bonds, and providing repo loans is “not very attractive,” Cryan said. That’s driven by recently implemented leverage and funding requirements as well as bank taxes in Europe that are determined by the amount of assets a lender has.

“Although we know that there’s a social pressure on us to be present in these markets, the way in which we were very important in the past with big pools of inventory, it doesn’t make sense anymore,” Cryan said.

The bank sees more opportunity in the high-yield bond and leveraged-finance businesses, as well as in offering interest-rate derivatives to clients including pension funds, insurance companies and sovereign-wealth funds, he said.

“We do realize that our competitive advantage still derives from our ability to write relatively complex business," he said. “I wouldn’t say it’s super complicated these days, but non-linear business still doesn’t deter us and we don’t mind putting relatively illiquid positions on the book.”

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