Volatile Volatility Leaves Europe Investment Banks Whipsawed

Updated on
  • Deutsche Bank, Credit Suisse slump after executive comments
  • Credit Suisse CEO says ‘March is a bit all over the place’
Bloomberg’s Elisa Martinuzzi discusses Deutsche Bank’s stock plunge.

Europe’s investment banks were upbeat after a spike in volatility at the start of the year promised to revive their battered trading units. By Wednesday, their exuberance had disappeared as quickly as it came.

Deutsche Bank AG cautioned that its securities unit was facing headwinds this quarter from a stronger euro and higher funding costs for the business, less than a week after predicting higher full-year trading revenue. Tidjane Thiam, the head of Credit Suisse Group AG who a month earlier declared his investment bank was alive and well, spoke of a “very confused” first quarter that left clients once again sitting on the sidelines.

“January was a strong month, February was strange and March is a bit all over the place,” Thiam summed it up at a Bloomberg event in London.

The comments sent shares of the lenders slumping, with Deutsche Bank approaching the lows during its darkest moments in 2016. Both banks are in the final stretches of multi-year turnaround efforts and have pinned their hopes for a revival of the trading business on a return of volatility, after years of cost cuts. But if volatility had returned this quarter, it wasn’t quite the kind the lenders had hoped for.

More Volatility

“On balance we all benefit from a bit more volatility, but if it goes up too much, everyone is suffering,” Marcus Schenck, the co-head of Deutsche Bank’s corporate and investment bank, said at the event. There will be “volatility in the volatility” going forward.

Traders crave volatility, or movements in asset prices, because they spur clients to make bets and hedge their investments. But moves that are too violent or not sustained over a longer periods may not have the desired effect and can catch banks off guard. In late 2014, when oil prices suddenly fell and credit spreads widened, the biggest U.S. lenders were caught wrong-footed by what Citigroup Inc. Chief Financial Officer John Gerspach then called “volatile volatility.”

Stocks Plunge

Volatility returned to markets this February, as U.S. stocks had their worst single-day plunge in almost seven years and 10-year Treasury yields reached the highest level in more than four years. Banks including JPMorgan Chase & Co. and Citigroup Inc. have forecast higher trading revenue for their first quarters, which end in March.

Credit Suisse, too, seemed upbeat in February, saying that trading revenue had rebounded at the start of the year along with unsteady markets. By Wednesday, however, Thiam cautioned that while there are positive tailwinds from the economy, “people are just sitting on the sidelines” recently.

Thiam, speaking at an investor conference Thursday, said revenue in dollar terms at the firm’s global markets business so far is similar to what the bank posted in the first quarter of 2017. “It will be a profitable quarter, but less so than we thought after six weeks,” he said.

‘Third Phase’

Deutsche Bank had struck an even more optimistic tone just a week ago, when it predicted in its annual report that volatile markets are here to stay and will help it arrest two years of declines at its debt-trading business. The bank’s executives have been pleading with investors for patience, with Chief Executive Officer John Cryan saying in January that his turnaround had entered a “third phase” in which revenue should start to grow again.

Cryan, speaking in Tel Aviv on Thursday, said that the bank has raised a lot of money and needs to find ways to deploy it.

While the bank’s full-year forecast is still intact, Chief Financial Officer James von Moltke said at an investor conference in London that the euro’s gain against the dollar will reduce revenue in the securities unit by about 300 million euros ($368 million) this quarter. Meanwhile, higher funding costs will weigh on the unit to the tune of 150 million euros, he said.

An otherwise constructive environment “means that we’re sort of, depending on the business, flat to slightly down from last year,” von Moltke said. In addition, the first quarter of 2017 was “relatively strong,” making for “a more difficult comparison.”

‘Show-Me Case’

Both Deutsche Bank and Credit Suisse extended losses on Thursday, with Deutsche Bank falling 1.9 percent as of 12:18 pm in Frankfurt and Credit Suisse declining 2.8 percent in Zurich. They slumped about 5 percent and 3 percent respectively on Wednesday.

UBS CEO Sergio Ermotti, also speaking at an investor conference Thursday, said there’d been a “very euphoric” start to the year for capital markets, while declining to provide further guidance for the bank’s first-quarter revenue. He said a planned switch to U.S. dollar reporting will help reduce foreign-exchange related volatility in earnings.

“There has been a very euphoric start to the year,” Ermotti said. “The rest is more of the same as we have seen in the last few years.”

At Deutsche Bank, Schenck acknowledged that management still has some work to do to convince shareholders its turnaround plan is working, almost three years after Cryan first outlined his strategy.

“John has always made it very clear. Look, this is not a one-quarter journey. This is a several-year journey,” Schenck said. “We think we’re on the right path with that journey. But we definitely are a show-me case.”

— With assistance by Stephen Morris, and Patrick Winters

(Adds comments from Credit Suisse’s Thiam in ninth paragraph; updates shares.)
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