Deutsche Bank Slump Hits Hedge Fund Unit It’s Trying to Grow

Dichtl: Deutsche Bank May Need Painful Capital Increase
  • Prime finance unit suffers from lower client activity levels
  • Contributed to 31% drop in equity sales and trading revenue

Deutsche Bank AG said second-quarter revenue dropped at its prime finance unit, extending a slump beyond businesses that Germany’s largest lender is seeking to exit as client concerns added to volatile markets.

The prime finance division, which caters to hedge funds, booked a drop in revenue in the second quarter, driven by lower “customer balances, lower client activity levels and market uncertainty,” the bank said in its earnings presentation Wednesday. The business sits within its equity sales and trading unit, which posted a 31 percent decline in second-quarter revenue to 720 million euros ($791 million).

The Frankfurt-based bank has been investing in prime brokerage as it allows the firm to win fees for other follow-on services and encourages trading with the bank. While Deutsche Bank said in April that clients were reassured about its worthiness as a counterparty, continued questions about the firm’s capital eroded that confidence last quarter.

“Doubts were raised about our financial strength,” Chief Executive Officer John Cryan wrote in a letter to employees posted Wednesday on the bank’s website. “These were unjustified, but they unsettled some clients and that made our day-to-day work more difficult.”

Markets Revenue

Deutsche Bank ranked between fourth and sixth among the biggest global banks in revenue from prime services in 2015, according to data from Coalition Development Ltd. In October, Credit Suisse Group AG, which ranked in the same range, identified prime services as an area where it was scaling back capital as part of a wider overhaul under new CEO Tidjane Thiam. The Swiss bank subsequently said in March that prime services was earmarked for additional investment.

Deutsche Bank said Wednesday that its global markets unit, which houses its sales and trading arm and is run by Garth Ritchie, posted a 28 percent drop in net revenue to 2.42 billion euros as it pulled back from some fixed income businesses such as U.S. government-backed mortgage bonds. The bank said it’s halfway through the process of withdrawing from countries it plans to exit at its global markets arm and has already withdrawn from its onshore business in Russia.

“We performed less well than our U.S. peers, but that has much to do with differences in geographic exposure where U.S. markets were more robust,” Cryan said in his letter. “Nonetheless, in our core foreign exchange and rates businesses, as in many other areas, revenues were stable compared with a year earlier.”

Brexit Trading

Deutsche Bank’s foreign-exchange trading revenue was flat from a year earlier, but it did see “significant client activity” around the European Union referendum in the U.K., the bank said. It echoes comments made by JPMorgan Chase & Co. in June that its currency trading volumes reached a record around the British vote to leave the EU that month.

Deutsche Bank said the markets unit may not follow its typical pattern of posting significantly more revenue in the first half of the year than in the second half, as investors didn’t transact often in the first quarter of the year.

“Our sense clearly is that investors, particularly in quarter one have been very much sitting on the sidelines, not moving,” Chief Financial Officer Marcus Schenck said on a call with analysts. “And, we gradually are seeing some of that liquidity come back to the markets.”

The bank’s corporate and investment banking unit, run by Jeff Urwin, booked a 12 percent decline in revenue to 1.89 billion euros as clients aborted or postponed mergers and companies and on lower global issuance volumes.

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