Deutsche Bank set for investor scrutiny as short sellers circle

[FRANKFURT] Deutsche Bank AG's John Cryan will try to convince investors this week that his efforts to turn around Europe's biggest securities firm will succeed. It's a narrative that's becoming harder to sell.

The quarterly update on Wednesday comes nine months after Cryan announced plans to cut thousands of jobs and shrink risky assets to boost profitability and capital levels. The chief executive officer has since had to put the sale of German consumer lender Deutsche Postbank AG on hold, scrap the development of a "digital bank" and contend with the departure of several senior bankers.

The stock has lost more than half its value over the past year, and hedge funds including Marshall Wace LLP have bet that the shares will fall further. Analysts have signaled concerns about the capital strength of a company that has some of the biggest holdings of complex assets and derivatives among European banks.

Deutsche Bank failed to complete the sale of its 20 per cent stake in Chinese lender Huaxia Bank Co in the second quarter, slowing efforts to build capital. At 10.7 per cent, the company's common equity Tier 1 ratio, a key measure of financial strength, was the third lowest among Europe's 25 biggest publicly traded banks in March. The ratio probably rose to 10.8 per cent in the second quarter, according to the average estimate of seven analysts compiled by Bloomberg. While the bank exceeds the current regulatory minimum, the ratio is below the level it will be required to reach in 2019.

Deutsche Bank's fixed-income and currency trading business, its biggest source of revenue, probably faltered in the second quarter as it pulled out of some capital-intensive businesses, with analysts forecasting a drop of 13 per cent from a year earlier to 1.95 billion euros (S$2.9 billion).

That compares with the 22 per cent jump in the combined debt-trading revenue of the five biggest US investment banks over the same period, data compiled by Bloomberg show.

The UK's decision last month to leave the European Union sent shock waves through markets. While analysts say investment banks may have benefited from a jump in currency trading, the resulting economic uncertainty means fees from underwriting securities and advising on mergers could decline in coming quarters. Frankfurt-based Deutsche Bank, which generated 19 per cent of its revenue in the UK last year, says it's better placed to win fees in Europe than US peers who have their EU headquarters in London.

Short interest in Deutsche Bank has declined after reaching the highest in more a year earlier this month. Soros Fund Management took a short position in Germany's biggest bank of about 7 million shares last month. Sealight Capital, a one-year-old hedge fund betting against financial-industry stocks, told investors this month that Deutsche Bank may be forced into a bailout this year, according to a note seen by Bloomberg. David Thompson, CEO of Sealight, and a spokesman at Deutsche Bank declined to comment. Sell ratings make up a higher percentage of analyst recommendations on Deutsche Bank than on any other major European lender.

BLOOMBERG