Deutsche Bank Trading Revenues below Estimates: May Raise Cash by Selling Stock

Deutsche Bank’s trading revenues for both debt and equity trading for 4Q16 were below estimates sending more jitters among its investors.

The bank’s debt trading revenue, which is its biggest source of income, increased 11% YoY to €1.38 billion, yet fell short of average analysts’ estimates of €1.68 billion while the equity trading revenue decreased 23% to €428 million. Analysts had estimated equity trading revenue to remain flat.

Deutsche Bank AG’s two years losses are driven by multiple business and legal woes. CEO John Cryan’s has been attempting to shrink trading operations and raise capital levels to make up for misconduct losses in the form of legal penalties and fines.

The bank has been settling a few of its big legal cases in the last two months. Yet, US Justice Department’s request to pay $14 billion to settle mortgage-backed bonds seems to have spooked investors in the 4th quarter.

Marcus Schenck, the Chief Financial Officer of Deutsche Bank AG said that the bank may look at selling stock to raise cash that has been eroded in the last two years. The option to raise capital through stock sales will potentially prevent damage to shareholders.

He further said that although stock sales is an option that the Frankfurt-based lender may resort to, their primary tool to improve cash holding is through organic growth.

The CFO said in an interview, “We’d never rule out any instruments. The primary tool we want to use is organically generate profit,” though if need be, or if we see value, we could in principle also deploy the tool of raising equity.” These are strong comments indicating the bank’s intention to reach out to shareholders as earnings are being hit by misconduct fines.

Although earlier the CEO, John Cryan, said that sales of shares cannot entirely reverse poor organic growth, many industry analysts believe that the bank may be left with no other option at this time to increase capital.

Deutsche Bank reported a loss again for the fourth quarter of 2016 though it said that the net loss has narrowed to €1.89 billion from last year’s figure of €2.12 billion.

While revenue figures for Deutsche Bank AG were discouraging, in another important capital strength parameter, the common equity Tier 1 ratio, the Frankfurt lender’s number increased to 11.9% from 11.1% in the third quarter. The bank reiterated its commitment to enhancing the Tier 1 ratio to 12.5% by end 2018.

The bank, however, indicated that litigation costs will continue into 2017. The capital standards under Basel III could increase about €100 billion to the bank’s risk-weighted assets. At the end of 2016, the risk-weighted assets of Deutsche Bank stood at €385 billion, the CFO said.

He further added, “The fourth quarter was arguably the most difficult quarter in almost a decade for us, given all the noise around the bank.” In 4Q16, the bank got hit with €1.59 billion as litigation charges more than analysts’ estimate of €1.28 billion.