Among the thousands of people at Deutsche’s investment bank, credit traders have traditionally ruled the roost. It’s the credit traders, after all, who run Deutsche’s best-ranked business and who historically generated big profits (alongside big losses in the financial crisis).
Times have changed, however. Nowadays, employees at Deutsche’s investment bank might want to give a little love to their colleagues who’ve been hived off into a whole new division: the forsaken traders in the capital release unit (CRU). JPMorgan says it’s they who are now crucial to Deutsche Bank’s future.
The capital release unit made a loss of €1bn in the third quarter and €2.4bn in the first nine months of this year. In a note on last week's DB results, JPMorgan banking analyst Kian Abouhossein notes that Deutsche’s CRU also made €223m in ‘negative revenues’ in Q3, while one year previously the comparable trading books achieved positive revenues of €459m. The bank said there were good reasons for this, including hedging and de-risking activities, €19m in debt valuation adjustments and €81m due to an 'update in valuation methodology.' Net of 'liquidity and other funding costs', DB said operating revenues in the unit were close to zero. However, with costs of €790m in the third quarter alone, the CRU is still running at a considerable loss.
Abouhossein's fear is that these losses will continue. He forecasts an ongoing risk of €100m of negative revenues each quarter from the CRU, until the unit is finally closed in 2022. Deutsche Bank's return on equity could suffer as a result.
The bank itself seems untroubled by its troubled asset unit. Speaking during the third quarter investor call, CFO James Von Moltke said the risky portfolios have now been derisked and the portfolios "vetted down." In future, Von Motlke said portfolios in the CRU should be easier to manage and there should even be a "relatively small revenue contribution" from the unit between now and its closure in three years' time.
Deutsche's shareholders need to hope Von Moltke is right. They also need to hope that the 1,500 front office people still working in Deutsche's CRU don't disappear before Deutsche wants them to. Rival banks have already been picking off some of the top talent, and there were suggestions in the summer (denied by the bank) that teams were becoming so thin that Deutsche would need to hire some more traders for the unit soon. With pay in the CRU averaging just €60k in the first nine months of 2019, this may be easier said than done.
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