January 8, 2018 / 4:38 PM / a year ago

Deutsche gloom deepens on Q4 trading, costs

LONDON, Jan 8 (IFR) - Deutsche Bank’s warning that fourth quarter trading revenues will fall more than a fifth from the year before is even worse than it looks, as unlike most rivals it is down from one of its weakest periods ever.

Deutsche also signalled that costs are not falling as fast as expected, raising concern that chief executive John Cryan is making little progress with his attempt to turnaround Germany’s flagship lender.

Deutsche Bank said late on Friday its fourth quarter revenues for fixed income, currency and equity sales, and trading and financing would be down about 22% from a year ago.

That would see its trading revenues fall to €951m, or 30% lower than the €1.37bn analysts had expected the bank to bring in from trading revenues, according to the consensus of 16 analyst forecasts before the update.

“It looks like a bit of a shocker. The numbers are way off the pace in terms of where consensus was and the indications from other banks,” said Piers Brown, European banks analyst at Macquarie.

“It’s a difficult basis on which to have any confidence they’ve turned around the market share problem they’ve had for the last year and a half.”

Deutsche blamed last quarter’s fall on “low volatility in financial markets and low levels of client activity”. It gave few other details on where trading has stumbled.

Several US banks, including JP Morgan, Citigroup and Bank of America Merrill Lynch, have previously warned that low volatility and subdued trading would mean revenues fall about 15% from a year ago.

But the decline for US banks was exacerbated by a tough comparative period in the fourth quarter of 2016 when they enjoyed strong trading revenues, before and after the election of Donald Trump as US president.

Deutsche has no such excuse. It brought in €1.2bn in debt and equity sales and trading revenues in the fourth quarter of 2016, easily its worst quarter since the bank restructured at the start of 2016.

It would cap a grim 2017 for Deutsche, when it underperformed investment bank rivals every quarter.

For the first nine months its debt trading revenues were down 11% from a year earlier (compared with a 6% decline on average across the big five US banks), its equities revenues slumped 18% (up 1% at US rivals), and its advisory and underwriting income was down 2% (up 18% at US banks).

Pressure is expected to build again on Cryan, who was appointed in 2015 to steer the bank’s return to profit, but who is facing renewed questions over his strategy. He has made several attempts to restructure the corporate and investment bank, and last March put former chief financial officer Marcus Schenck in charge, alongside Garth Ritchie, head of global markets.

COST CONCERN

Analysts said of potentially greater concern was Deutsche Bank’s guidance on Friday about elevated costs for Q4, which are now expected to be broadly in line with a year earlier.

That would see adjusted costs of about €6.2bn - or €420m higher than the €5.8bn analysts had expected.

That would halt progress Cryan had been showing in reducing costs. In the first nine months of 2017 adjusted costs were €17.5bn, down 6% from the same stage of 2016.

“The key bull point you could take from the results so far for 2017 was the cost performance, because it’s generally been good,” Brown said. “But this will raise fears that a lot of that has just been because they accrued very low bonuses for nine months, and now they are having a major top-up in the fourth quarter.”

Analysts said the investment bank was caught between trying to maintain market share while cutting pay. Cryan slashed bonuses last year, but he told a German newspaper last month he would resume the payment of normal bonuses for 2017.

Macquarie’s Brown said US banks were taking market share and could be squeezing their cash-strapped European rivals in what they were offering in staff pay.

“The competitive landscape has been difficult and it doesn’t look like it’s getting any easier,” he said.

Deutsche’s gloomy trading and costs updates on Friday were also accompanied by other bad news: it will take a €1.5bn one-off hit from the impact of US tax changes in the fourth quarter, which will drag it to its third straight annual loss in 2017.

The bank’s shares fell 5% on Friday and lost another 1.3% on Monday. (Reporting by Steve Slater)

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