Deutsche Bank Loses Millions on Derivative Trades

Oct.28.08 | About: Deutsche Bank (DB)

If equity derivatives are a way of minimizing financial risk, then in Deutche Bank’s (NYSE:DB) case that argument is certainly valid only in theory. According to Bloomberg, so far, the Frankfurt-based company has lost 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 company's second-quarter revenue from equity sales and trading.

Deutsche Bank said that 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.

In a note to investors, Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets said:

The dislocations on capital markets in September must have had a catastrophic impact on the business at Deutsche Bank.

In fiscal ‘07 Deutsche Bank’s securities unit accounted for almost half of the bank’s total profit.

On Monday, in NYSE trading, DB dropped 10.60% to $31.87.

Disclosure: None