Volatile volatility leaves Europe investment banks whipsawed

FRANKFURT • Europe’s investment banks were upbeat after a spike in volatility at the start of the year promised to revive their battered trading units. By Wednesday, their exuberance had disappeared as quickly as it came.

Deutsche Bank AG cautioned that its securities unit was facing headwinds this quarter from a stronger euro and higher funding costs for the business, less than a week after predicting higher full-year trading revenue. Tidjane Thiam, the head of Credit Suisse Group AG who a month earlier declared his investment bank was alive and well, spoke of a “very confused” first quarter (1Q) that left clients once again sitting on the sidelines.

“January was a strong month, February was strange and March is a bit all over the place,” Thiam summed it up at a Bloomberg event in London.

The comments sent shares of the lenders slumping, with Deutsche Bank approaching the lows during its darkest moments in 2016. Both banks are in the final stretches of multi-year turnaround efforts and have pinned their hopes for a revival of the trading business on a return of volatility, after years of cost cuts. But if volatility had returned this quarter, it wasn’t quite the kind the lenders had hoped for.

“On balance we all benefit from a bit more volatility, but if it goes up too much, everyone is suffering,” Marcus Schenck, the co-head of Deutsche Bank’s corporate and investment bank, said at the event. There will be “volatility in the volatility” going forward.

Traders crave volatility, or movements in asset prices, because they spur clients to make bets and hedge their investments. But moves that are too violent or not sustained over a longer periods may not have the desired effect and can catch banks off guard. In late 2014, when oil prices suddenly fell and credit spreads widened, the biggest US lenders were caught wrong-footed by what Citigroup Inc CFO John Gerspach then called “volatile volatility”.

Volatility returned to markets this February, as US stocks had their worst single-day plunge in almost seven years and 10-year Treasury yields reached the highest level in more than four years. Banks including JPMorgan Chase & Co and Citigroup Inc have forecast higher trading revenue for their 1Qs, which end in March.

Credit Suisse, too, seemed upbeat in February, saying that trading revenue had rebounded at the start of the year along with unsteady markets. By Wednesday, however, Thiam cautioned that while there are positive tailwinds from the economy, “people are just sitting on the sidelines” recently.

Deutsche Bank had struck an even more optimistic tone just a week ago, when it predicted in its annual report that volatile markets are here to stay and will help it arrest two years of declines at its debt-trading business. The bank’s executives have been pleading with investors for patience, with CEO John Cryan saying in January that his turnaround had entered a “third phase” in which revenue should start to grow again.

Cryan, speaking in Tel Aviv yesterday, said that the bank has raised a lot of money and needs to find ways to deploy it.

While the bank’s full-year forecast is still intact, CFO James von Moltke said at an investor conference in London that the euro’s gain against the dollar will reduce revenue in the securities unit by about €300 million (RM1.5 billion) this quarter. Meanwhile, higher funding costs will weigh on the unit to the tune of €150 million, he said.

An otherwise constructive environment “means that we’re sort of, depending on the business, flat to slightly down from last year”, von Moltke said. In addition, the 1Q of 2017 was “relatively strong”, making for “a more difficult comparison”. UBS’ potential switch to US dollar reporting will help reduce foreign-exchange related volatility in earnings, CEO Sergio Ermotti said at an investor conference yesterday. He said there’d been a “very euphoric” start to the year for capital markets, while declining to provide further guidance for the bank’s 1Q revenue.

Both Deutsche Bank and Credit Suisse extended losses yesterday, with Deutsche Bank falling 1.4% as of 10:07am in Frankfurt yesterday and Credit Suisse declining 1% in Zurich. They declined about 5% and 3% respectively on Wednesday.

“Credit Suisse fell in sympathy with Deutsche after the comments of the CFO, which suggested that March wasn’t as great as January and February with respect to trading revenues,” said Piers Brown, an analyst in London with Macquarie Bank Ltd.

Schenck acknowledged that Deutsche Bank still has some work to do to convince its shareholders its turnaround is on track, almost three years after Cryan first outlined his strategy.

“John has always made it very clear. Look, this is not a one-quarter journey. This is a several-year journey,” Schenck said. “We think we’re on the right path with that journey. But we definitely are a show-me case.” — Bloomberg