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September 2009 | ifr special report | 9 GERMANY German bank equity prices

took a famously bearish view on the US housing market, and the firm traded accordingly – it later found itself suffering from having underestimated to what extent problems would rise up the capital structure of ABS exposure. When super- senior positions began to take big hits, the losses mounted up. Write-downs of €2.7bn in that first quarter of 2008 took the firm to a pre-tax loss of €254m, with pre-tax losses of €1.6bn in just the corporate banking and securities division – effectively the investment bank. As a result of the bank’s status as national icon, the result led to much breast-beating and contrition. But worse was to come. The collapse of Lehman Brothers in September 2008 led to a huge loss of almost €4.8bn in Deutsche’s sales and trading operation in the fourth quarter of the year, taking the firm to an overall loss of €5.7bn for 2008, with losses of €8.5bn in the corporate banking and securities division.

The strong trading performances in the first half of 2009 – far outweighing origination revenues – have put the ship back on an even keel, however. Equity and fixed income trading accounted for 75% of the corporate banking and securities revenues in the second quarter of 2009, and a staggering 95% in the first quarter. In the first half of the year, the bank as a whole made €3.1bn in pre-tax profits, with corporate banking and securities making profits of €2.15bn. Equity trading in the second quarter, the highest revenues for six quarters, was strongly boosted by the bank’s equity derivatives performance. The recovery in origination revenues has been much slower than on the trading side, and in some areas the bank has un- derperformed even taking into account the backdrop of the crisis. Equity capital markets has been one obvious area of dis- appointment, driven by the firm’s relative

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Source: Thomson Reuters Datastream

weakness in financial institutions coverage. Even after a better performance this

year, the bank is outside the top five in the European equity league table. At the same time last year it ranked in eighth place. Senior management on the capital markets side freely concede that the firm has suffered throughout the crisis from its less strong financial institutions coverage, with ECM the most obviously affected, given how much European and US dealflow has been driven by banks shoring up their balance sheets.

The result was that revenues in equity origination were very low in 2008, with the bank notching up just €336m for the whole year (compared to €861m in 2007). This year promises to be better, with €300m already achieved in the first half. Financial institution coverage has histor- ically not been a strong area for Deutsche, meaning that the bank has missed out on a large chunk of work thrown up by the crisis. It is also not a strong sovereign house, but while senior bankers at the firm argue that the extent of sovereign activity would have been hard to predict ahead of the crisis, it was already known that the FIG franchise needed bolstering. Nevertheless, management is adamant that the situation has now been tackled – albeit belatedly. They point to hires this year in FIG and also a substantial amount

of work that is being done behind the scenes in leveraging the bank’s expertise in other sectors to the benefit of CFOs at FIG names who want advice about other industries more than they have ever done in the past. For these reasons, bankers reject the accusation that the firm has missed the boat. “We may have missed one boat, but there are several more in the harbour,” said one senior executive. “There is another 18 to 24 months’ worth of equity work to happen in FIG.”

The firm’s corporate coverage, and par- ticularly in DCM, has for a long time been a franchise to beat. At the time of writing, it is so far this year neck and neck with Societe Generale for top place in euro- denominated corporate debt. It is also third in all investment grade euro bonds, second in subordinated financials, third in supras, second in agencies and third in all interna- tional bonds.

Other highlights have included the firm’s historically strong high-yield business, which has remained a dominant force in spite of the near-shutdown of the market in Europe and the US in the depths of the crisis. The firm is the leader in non- US dollar deals, with a 17% market share, ahead of Calyon with 8%. It is also top in European deals, with a 15% share. Even in US dollar deals it ranks fourth, fractionally behind Citigroup.

Financial institution coverage has historically not been a strong area for Deutsche, meaning that the bank has missed out on a large chunk of work thrown up by the crisis.

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Feb 09

Deutsche Bank Commerzbank

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