Deutsche’s fixed-income pain could exceed rivals’

October 29, 2013

By Dominic Elliott

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Deutsche Bank’s third-quarter hit in fixed-income trading could presage a painful loss in market share. The German bank suffered a 48 percent fall in third-quarter debt sales and trading revenue – as bad as any peer. And things could get tougher still.

Deutsche Bank still has the third biggest fixed-income trading franchise in the industry, on a rolling four-month basis. The unit rakes in about 10 percent of the overall revenue pool, according to Breakingviews’ calculations. Co-Chief Executive Anshu Jain believes Deutsche can gain market share as rivals retrench – witness Credit Suisse’s recent decision to slash interest rates trading. But Deutsche’s prized division has lost market share in each of the last two quarters, as well as missing consensus analyst estimates for revenue in each of the last four.

What’s more, a regulatory focus on gross leverage positions may make it harder for Deutsche to stay in fixed income’s top three. Deutsche wants to cut 250 billion euros of assets from its balance sheet. In the third quarter alone the bank achieved 15 percent – 38 billion euros – of this, mainly by managing its derivative contracts more efficiently. But its repurchase agreement business, or repo book, still constitutes over 10 percent of its total balance sheet, and is especially bloated in the United States.

There’s scope for Deutsche to hack this back – and a need, given that U.S. regulators want European banks with subsidiaries in New York to hold more capital. But that could come at the expense of fixed-income trading. Investment bank repo businesses are strongly correlated with fixed-income prowess. Every $100 billion of gross repo positions equate to about 2 percent of market share, according to Citi research.

There are two potential silver linings for Deutsche. The first is that of its two closest fixed-income rivals, Barclays is exposed to the same U.S. headwinds, while Goldman Sachs suffered a similarly large third-quarter revenue drop. The other is that banks may successfully lobby to exclude repo business from leverage calculations in the U.S. Against that, an additional 1.2 billion euros in litigation reserves showed that there are other distractions for management. Deutsche’s third-quarter trading pain could endure.

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