Deutsche Bank Lures Hedge-Fund Money as Credit Concern Abates

  • Prime broker growth seen; revenue flat even with tough markets
  • Cryan says bank reassured clients on counterparty risk

Deutsche Bank AG said hedge funds are parking more money at its prime brokerage, even amid difficult markets, as the German lender has reassured investors of its worthiness as a counterparty.

Prime finance was “supported by higher client financing revenues due to increased client balances,” with flat overall income due to tough market conditions, the bank said in a statement Thursday, as it reported a surprise first-quarter profit.

Co-Chief Executive Officer John Cryan said institutional investors should trust the counterparty credit rating the lender has from Moody’s Investors Service, rather than the cost of insuring Deutsche Bank’s debt, which surged earlier this year. The prime brokerage gained client balances even as hedge funds suffered their worst withdrawals since the financial crisis.

“When we focus clients on the A2 rating, I think they’re more than satisfied with us as a counterpart,” Cryan said on a call with analysts. “In our prime finance and the repo business, they like the service level, they like the products we offer, and we are keen to grow balances there.”

CoCos Jump

“We’ve made a lot of progress with most of our major institutional counterparts in communicating to them” on total loss-absorbing capital, Cryan also said. Deutsche Bank didn’t provide a breakdown for the quarter on prime broking earnings.

Worries emerged earlier in the year that declining profitability would erode Deutsche Bank’s ability to keep paying coupons on its riskiest bonds, known as CoCos or additional Tier 1 capital. While the panic has subsided since February, the cost of insuring against losses on Deutsche Bank’s debt is still 69 percent higher than the average for 12 of its biggest peers.

Prices for the bank’s CoCos, short for contingent convertible bonds, jumped today. Deutsche Bank’s 1.75 billion euros of 6 percent additional Tier 1 notes rose 1.18 cents on the euro to 83.6 cents, the most since March 15, data compiled by Bloomberg show. The Frankfurt-based lender’s four CoCo notes were the only significant gainers among members of Bank of America Merrill Lynch’s index of the securities.  The bank’s stock jumped as much as 5 percent.

Unlike some rivals, the Frankfurt-based bank is investing in prime brokerage, a key part of its stock-trading unit, because it isn’t subject to as tough capital requirements as debt trading and allows the firm to win fees for other services from clients. In October, Credit Suisse Group AG identified prime services as an area where it’s not recouping the cost of capital.

“There’s too much focus, I think, sometimes on shrinking ourselves to greatness,” Cryan said.

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