Deutsche Bank headquarters stands in Frankfurt. The biggest European investment bank by revenue is looking to strengthen its finances as clients hold off on trades and capital is siphoned by mounting costs from inquiries, lawsuits and tighter regulation.
Bloomberg/Frankfurt
Deutsche Bank, seeking to raise $11.6bn of capital, braced investors for a deepening trading slump and potential damage to its business from international probes of currency rigging and hiring practices.
A “challenging market environment” means the investment- bank division may post a larger year-over-year drop in revenue this quarter than in the first three months, when it fell 10%, the Frankfurt-based firm wrote in documents released yesterday for the stock sale. The foreign-exchange inquiries have potential to result in “significant financial penalties and other consequences,” it said.
Deutsche Bank, Europe’s biggest investment bank by revenue, is looking to strengthen its finances as clients hold off on trades and capital is siphoned by mounting costs from inquiries, lawsuits and tighter regulation. The firm said it’s offering investors €6.75bn ($9.2bn) of new shares, the main part of a package to raise €8.5bn.
The stock sale “should bring some calm to the constant concern the bank is weakly capitalized as it deals with its litigation bills,” said Ingo Frommen, an analyst at Landesbank Baden-Wuerttemberg who raised his recommendation for the stock to buy from hold. “The share sale will be successful unless there’s some kind of extreme negative macroeconomic event.”
Deutsche Bank led European investment banks lower yesterday after releasing the documents, sliding 3.8% in its biggest drop since January. Barclays, the region’s second-biggest investment bank, fell 1.1% in London.
The European Central Bank yesterday cut its deposit rate to minus 0.1%, potentially lowering revenue from bond trading. Deutsche Bank offered to sell its new shares for €22.50 apiece, a 24% discount to the closing price on June 4.
Deutsche Bank rose as much as 2.3% in Frankfurt trading yesterday, and was up 1.6% to €27.66 by 11:02 a.m. Barclays gained 0.9% to 242.40 pounds ($407.45). Co-Chief Executive Officer Anshu Jain, a former head of the company’s investment banking unit, has said he wants to invest in that business to win market share as competitors retrench. The division saw a “challenging market environment with low customer volumes and low volatilities in many key areas” during April and May, the bank said yesterday. Revenue at the unit fell to €4.08bn in the first quarter from €4.55bn a year earlier, the company said in April.
“Every bank is taking their numbers down in the trading part of the business,” said Gary Townsend, a former regulator who now runs the hedge fund GBT Capital Management in Chevy Chase, Maryland. “Across the board, this continues to be a poor environment for bank profitability, except to the extent they can glean economies out of their operations.”
While the ECB announced measures to prevent deflation and support the economy by providing banks with low-cost funding for loans, the record-low interest rates can erode investment banks’ profits.
“The low-rate environment has already destroyed the fixed- income, currencies and commodities revenue pool,” said Jonathan Tyce, senior banks analyst at Bloomberg Industries. “Lower rates and more stimuli can only add to the pressure.” Deutsche Bank said pretax profit in the unit catering to consumers and small- and mid-sized businesses fell in the two months through May from a year earlier, while earnings at the transaction-banking division showed improvement.
The asset and wealth management arm benefited from lower costs, it said. The pretax loss narrowed in the unit winding down assets that the firm doesn’t view as central to its business, the filing shows.
The probe of foreign-exchange trading is roiling an industry already under pressure to shrink costs.
At least a dozen regulators are examining allegations that traders at some of the largest banks manipulated benchmarks in the $5.3tn-a-day currency market.
The inquiries began after Bloomberg News reported last June that traders had colluded to rig WM/Reuters rates used by investors and companies around the world.
Deutsche Bank said it’s conducting an internal investigation.