By Elena Logutenkova and Aaron Kirchfeld
July 29 (Bloomberg) -- Deutsche Bank AG, once the second- biggest trading firm behind Goldman Sachs Group Inc., reined in risk-taking and lost market share during the second quarter, casting a pall on the German bank’s earnings prospects.
A 32 percent drop in fixed-income revenue eroded results for the sales and trading unit, the Frankfurt-based company reported yesterday. Led by Anshu Jain, the business generated 3.48 billion euros ($4.93 billion) buying and selling stocks, bonds, commodities and currencies in the period, down from 4.03 billion euros in the first quarter. The figures missed analysts’ estimates and trailed four of the bank’s largest rivals, including Zurich-based Credit Suisse Group AG.
The decline reflects management’s “discipline” in curtailing risks and shedding unwanted assets, Deutsche Bank Chief Financial Officer Stefan Krause said yesterday. Investors reacted to the results and a seven-fold increase in provisions for bad loans by sending the stock down the most in four months in Frankfurt trading.
“Deutsche Bank remains a powerhouse in fixed income, but the question investors are asking now is whether the ability to monetize this has been reduced,” said Huw van Steenis, a London-based analyst at Morgan Stanley. “As Deutsche bank de- risked, it also crimped earnings power.”
Shares of the bank fell 11 percent to 46.09 euros yesterday, the deepest slump since March 30. The decline trimmed this year’s gain to 68 percent, the eighth-biggest on the Bloomberg index of 63 European financial companies.
Ceding Ground
Under Chief Executive Officer Josef Ackermann, Deutsche Bank avoided taking government aid after booking fewer losses and writedowns during the global credit contraction than competitors such as Citigroup Inc. and JPMorgan Chase & Co., both in New York. The German firm captured a larger share of the trading market in 2007 as subprime mortgage delinquencies and sinking asset values hurt rivals’ earnings and depleted their capital.
The crisis depressed results across the industry last year, and Deutsche Bank has since lost ground in the business that is its biggest revenue producer, contributing almost half of total income from January through June. Jain’s sales and trading unit slipped to fifth place by revenue among the largest investment banks this year from second in 2006 and 2007, data compiled by Bloomberg show.
The 10 biggest investment banks collected almost $73 billion from sales and trading in 2007, and Deutsche Bank reaped 26 percent of that, according to company reports and Bloomberg data. Its portion shrank to 12 percent in the first half of this year, the same level as in 2006.
Credit Suisse
Credit Suisse increased its share through June to almost 13 percent from 9 percent in 2006. The Swiss bank was the fourth- biggest trader by revenue this year, up from seventh before the crisis.
Deutsche Bank’s co-head of credit trading, Boaz Weinstein, left the bank this year to start a hedge fund. The global head of distressed-debt trading, Martin Dent, also departed, along with Julian Nichols, who ran the business in Europe.
The firm’s investment bank, overseen by Jain, 46, and the 52-year-old Michael Cohrs, posted pretax profit of 828 million euros in the second quarter after a loss a year earlier, the company said yesterday. Analysts had estimated the securities unit would deliver 1.08 billion euros. Firmwide, net income rose 68 percent to 1.09 billion euros.
Credit Suisse said last week that second-quarter profit rose 29 percent to 1.57 billion Swiss francs ($1.47 billion) as sales and trading revenue more than doubled to 5.37 billion francs.
‘Cleaner and Better’
“Credit Suisse earnings remained resilient despite shrinking risks,” van Steenis said. “In contrast, Deutsche Bank was more impacted by taking risk out of the business.”
Deutsche Bank’s global markets division produced debt trading income of 2.6 billion euros, below analysts’ estimates. That compares with 602 million euros a year earlier, after 2.1 billion euros in markdowns. Equity trading generated 903 million euros in revenue, the most in six quarters and more than analysts predicted, helped by equity derivatives and North American business.
Fixed income was “disappointing” and underperformed competitors such as New York-based Goldman Sachs, which reported record revenue of $6.8 billion, said Kian Abouhossein, a London- based analyst at JPMorgan, in a note to investors.
“In the long term, it’s the right strategy” to cut risks, said Abouhossein, who has a “neutral” rating on the German bank’s shares, in a telephone interview. “Deutsche Bank becomes a cleaner and better bank, at a price of not being able to take risks, which clearly impacts earnings.”
Lower Leverage
Ackermann, 61, reduced the firm’s leverage ratio, a measure of its reliance on borrowed money, to 24 times by the end of June from 38 times a year earlier. So-called level 3 assets, which are the hardest to value and trade, declined 20 percent to 64 billion euros in the second quarter.
“The fact is that Deutsche Bank is taking fewer opportunities in the market,” said Guy de Blonay, who helps manage about $70 billion, including Deutsche Bank shares, at Henderson Global Investors Ltd. in London.
To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net; Elena Logutenkova in Zurich at elogutenkova@bloomberg.net
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