If equity derivatives are a way of minimizing financial risk, then in Deutche Bank’s (DB) case that argument is certainly valid only in theory. According to Bloomberg – the Frankfurt-based company has lost so far more than $400 million on equity derivatives trades. The performance of the financial contracts, whose valuations are based on fluctuations in other assets, was negatively impacted in the last several weeks by the increased correlation between equity markets, which led to a deterioration in the value of residual derivative positions arising from activities in retail structured products. As result, Germany’s biggest bank now faces a loss equal to almost half of the co.’s second-quarter revenue from equity sales and trading.
Deutsche Bank said in July Q2’08 revenue from equity sales and trading dropped to 830 million euros from 1.4 billion euros on a year-over-year basis as demand for equity derivatives waned. The write-downs also drove the banks’ second-quarter earnings down to 642 million euros compared with 1.8 billion in the same period last year. During the second-quarter, the investment bank’s equity sales and trading revenue dipped nearly 50% in the first half of the year.
The bank, led by Chief Executive Officer Josef Ackermann, as result of massive revenue loss, may now be forced to cut jobs across asset classes as well as fixed income. The losses have also prompted discussions about whether Deutsche Bank is too reliant on investment banking, which contributes roughly a third of its pre-tax profit.
“The dislocations on capital markets in September must have had a catastrophic impact on the business” at Deutsche Bank, Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets, said in a note to investors.
In fiscal ’07 Deutsche Bank’s securities unit accounted for almost half of the bank’s total profit.
DB dropped 10.60% to $31.87 in NYSE trading.