What Risk: Deutsche Bank Ramps Up Loans Business In Desperate Scramble For Profit

We have some sympathy for John Cryan, but only to the extent that he has the near impossible task of putting the biggest German bank back on a sound footing regaining market share and generating some elusive revenue growth: a virtually impossible task as long as Europe is choked by NIRP. As we noted two weeks ago, Deutsche’s 3Q 2017 results confirmed that the situation is still getting worse:
Deutsche Bank’s Q3 2017 revenues were 6.78 billion, below market expectations of 6.88 billion. The share price fell 2.7% shortly after the European market open. The problem – like the previous quarter – was a bigger-than-expected drop in trading revenues. Trading revenue was down 30% year-on-year to 1.512 billion versus 2.162 billion in Q2 2017. The challenge for the embattled CEO, John Cryan, is that the trend is still deteriorating. Trading revenues in Q2 2017 fell 18% year-on-year to 1.666 billion euros versus 2.027 billion euros. Earlier this year, Cryan pledged to turnaround the performance of the investment bank as soon as this year. At the time, we wondered if Cryan’s time wasn’t running out: “The countdown to Cryan’s replacement is ticking ever louder.”
So if you were Deutsche CEO Cryan and you needed revenue growth and you needed it fast, what would you do? One thing is to identify a ‘hot’ sector in capital markets with high margins and go all out for growth, never mind the risk. Which is exactly what Deutsche Bank is doing in the leveraged loan market as Bloomberg implies.
While investors are attracted to the high yields from leveraged loans, investment banks are lured by the fees. ‘Leveraged finance is juicy, juicy stuff,’ said Tim Hall, global head of debt capital markets at Credit Agricole SA until last year. ‘In corporate banking, it probably hast the best margins.’ Yet the fees are lucrative for a reason: banks take the risk that investor appetite for leveraged loans may suddenly disappear before they can sell on the debts. Deutsche Bank lost about 2.5 billion euros on ‘leveraged loans and loan commitments’ in 2007 and 2008 combined, annual reports show. ‘Anyone getting into this sector today should have a good understanding of where we’re at in the cycle of leveraged loans,’ said Knutson. ‘Are we closer to midnight in terms of the exhaustion of it or are we halfway through?’

This post was published at Zero Hedge on Nov 8, 2017.