Deutsche Bank, Eluding Risk, Attempts To Narrow Gap With Goldman Sachs

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Deutsche Bank AG is finding out just how hard it is to be more like Goldman Sachs Group Inc.

A decade after Germany’s largest bank set out to reinvent itself as a Wall Street-styled securities firm, only New York-based Goldman earns more money from trading stocks, bonds, currencies and derivatives. And there’s little prospect that the gap between them will narrow anytime soon because Frankfurt-based Deutsche Bank eludes the risk-taking that characterizes Goldman.

While Goldman’s sales and trading revenue almost doubled to $12.9 billion in the first half on big bets in the oil and stock markets, No. 2 Deutsche Bank could only manage a 38% increase to $9.7 billion during the same period with a trading strategy that’s deliberately risk-averse.

“Deutsche Bank has made a lot of progress, but it will be a big task for them to take on the top tier of Wall Street,” said Dale Robertson, who helps manage $1 billion in stocks at Edinburgh Partners in the Scottish capital, including shares of Deutsche Bank. “They still have a ways to go.”

Wall Street’s traders have been the engine behind more than three years of rising profits at securities firms, including Goldman, Deutsche Bank, UBS AG, Citigroup Inc.and Morgan Stanley.They typically account for about three quarters of investment-banking revenue, with the rest coming from underwriting securities and advising on mergers.

To make the most of trading opportunities for themselves and clients, firms have increased their so-called value at risk, a measure of how much they could lose in a day if the markets turned against them. While Goldman’s value at risk was 40% higher in the second quarter than at the end of last year, Deutsche Bank’s risk was almost unchanged, company filings show. Value at risk is calculated differently at different banks.

“We have made a strategic decision to pursue a client-driven approach to sales and trading, which has produced consistently strong returns for our shareholders in a wide variety of market conditions,” said Deutsche Bank spokeswoman Rohini Pragasam. “We believe we have the appropriate product suite, revenue mix and risk-management capabilities to continue generating superior performance for our clients and shareholders.”

Traders have made some of the quickest profits — and losses — in history. In 1992, George Soros’s Quantum Fund made more than $1 billion betting that the peg between the British pound and the currencies of Europe would break. Long-Term Capital Management LP, a hedge fund run by former Salomon Brothers Vice Chairman John Meriwether, lost $4 billion in 1998 after a debt default by Russia. Securities firms don’t normally disclose specific trades.

To enable Deutsche Bank to maintain its profitability target of at least a 25% return on equity before taxes, Chief Executive Officer Josef Ackermann, 58, is relying on Anshu Jain, 43, who oversees sales and trading as co-head of the investment banking division with Michael Cohrs, 49. The bank can show only a 15% gain in its shares since Mr. Ackermann took over in May 2002, while profits have risen almost ninefold.

Even though Goldman’s swings in trading revenue exceeded those of all its biggest rivals for five of the past six quarters, it has still posted three years of rising trading revenue. Deutsche Bank’s quarterly sales and trading revenue, which fell in 2004, seesawed like that of its top four competitors during the past year and a half, rising 88% in the first quarter and falling 29% in the second.

“The more volatile the earnings, implicitly, the lower quality they are,” said Keefe, Bruyette & Woods Ltd. analyst Matthew Clark in London.

Sales and trading, which includes packaging, trading and selling securities such as credit derivatives and providing brokerage services to hedge funds, accounted for about half of Deutsche Bank’s total revenue in the first half of this year.

“They’re more dependent on their trading business than peers like the Swiss banks or the big French banks, largely because the rest of their business isn’t as profitable,”said CreditSights Inc. analyst Simon Adamson in London.

When Deutsche Bank on August 1 reported a $128 million loss from equity trades for its own books in the second quarter, investors who shrug off greater swings from Goldman sold the shares, sending the price down 4.7%.

The loss followed a 400 million-euro gain in the first quarter and surprised shareholders who have become accustomed to Ackermann downplaying trading risk. He wrote in an August 2004 letter to the Economist magazine that Deutsche Bank had “deliberately and dramatically reduced its dependence on risk-taking as a source of operating earnings.”

Investors would prefer “a substantial profit stream from the operating business and not from the trading business,” said Markus Barth, who helps manage about $8 billion at Hamburg-based Nordinvest GmbH and is a Deutsche Bank shareholder. “The market doesn’t like that kind of uncertainty.”

Deutsche Bank’s first-half revenue from equities was $3 billion, far behind the $4.8 billion reported by Goldman, as well as Zurich-based UBS and New York-based Merrill Lynch & Co. and Morgan Stanley. In oil and energy trading where Goldman had estimated revenue of $1.5 billion last year, Deutsche Bank hardly trades a barrel.

In investment banking, Deutsche Bank is a laggard compared with Goldman, which uses its perennial No. 1 position in providing mergers advice and underwriting stock sales to win trading clients. Deutsche Bank is this year’s ninth-ranked takeover adviser, and eighth in arranging share sales, data compiled by Bloomberg show. The German company is the third-ranked underwriter of international bond offerings, after placing first last year.

Deutsche Bank has outpaced its European competitors, including UBS, Societe Generale SA and Credit Suisse Group, in sales and trading. The company last year leapfrogged UBS, Europe’s largest bank, and New York-based Citigroup, the biggest American bank.

“The European investment banks still don’t have the strength in trading that you see at U.S. firms, where risk-taking and capital commitment has been a part of their capital markets business for decades,” said Bruce Weber, a professor at the London Business School. “European capital markets have been dominated by bank lending and debt instruments.”


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