Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

This is what it looks like when your bank -- not the market -- is the problem.

On Thursday, Deutsche Bank AG posted a wider loss than analysts predicted for 2016 as revenue fell to the lowest in five years.

Revenue Rollercoaster
Deutsche Bank's net revenue fell to the lowest in at least five years in 2016
Source: Company filings

There is some relief: CEO John Cryan can claim to have resolved some of the big litigation threats hanging over the bank and to have increased the core capital ratio to almost 12 percent without resorting to a dilutive stock offering.

But the bank's profit and balance-sheet issues exposed it to sporadic and acute losses of market confidence last year and frayed clients' nerves -- trust that is hard to win back. The share fell as much as 7 percent in response.

Investors are right to be concerned. The most urgent challenge facing Cryan is fixing his bank's brand and reputation on the market, and making sure revenue isn't lost forever. As he tries to achieve that, a capital-raising -- one that allows the firm to thrive, not just to survive -- may start to look like the least worst option. It's not impossible: bankers are increasingly confident UniCredit SpA will successfully raise a whopping 13 billion euros to strengthen its capital position.

Last year, an investment bank could credibly point to client risk aversion, central-bank policy or regulatory uncertainty to explain away losses. No longer: Donald Trump is in the White House, bond yields are rising and Deutsche Banks's U.S. peers reported a blowout fourth quarter for trading.

Another Year To Forget For Shareholder Returns
Return on equity (ROE) at Deutsche Bank was negative for 2016
Source: Company filings

Cryan's team largely missed out on that. Fixed-income trading revenue rose 10 percent, a far cry from the 43 percent gains recorded by U.S. peers, according to Goldman Sachs estimates. In equities, revenue tumbled 23 percent. For U.S. peers, it rose 3 percent.

Bad Trade
Deutsche Bank's sales and trading revenue has declined in recent quarters
Source: Company filings

The German lender is clearly still in retrenchment mode: average value at-risk was at its lowest in at least two years in the last three months of 2016. The lender itself admitted "DB specific" concerns" had lost it business.

For all Cryan's talk of a "strong start" in January and hope that 2016 will be the low-point for revenue, the pain could still worsen.

The bank's strategy remains to shrink its cost base and sell assets to avoid a capital increase. This is likely to hurt the bank's top line as diverse businesses are jettisoned and key rainmakers depart.

Cryan's targets imply revenue will be higher than at present. Even after reducing headcount and cutting compensation and benefits by 1.1 billion euros in 2016, Deutsche Bank's adjusted costs were 24.7 billion euros in 2016 -- well above the 2018 target of less than 22 billion euros.

And while there's no doubt Deutsche Bank's balance sheet is in better shape than it was last year, its 11.9 percent core capital ratio is still below its 12.5 percent target. Regulatory pressures are only going to widen the gap.

Cryan's ability to dodge a capital-raising in times of market panic has been remarkable. But he now faces a multi-year struggle to soldier on without tapping shareholders or damaging the brand. Asset sales might offer tempting infusions of cash, but would only put more pressure on the trading business to grow revenue. The momentum towards a capital hike to thrive is starting to build.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net