LONDON: The slump in the hedge fund industry hit an unlikely target when Deutsche Bank AG (DB) reported earnings with a drop in revenue for its Prime Finance unit due to low “customer balances, client activity levels, and market uncertainty.” The equity sales and trading unit posted a 31 percent decline in second quarter revenue to $791 million. Last year, the bank had reported a 17 percent jump in revenues for its equity trading unit to $2.75 billion for the first nine months of 2015.
The bank had positioned the Prime Finance unit as a partner to the hedge fund industry for stock trading. Former co-CEO Anshu Jain had bet on growing its trading unit to challenge US hegemony of capital markets. However, a combination of weak consumer demand that decline profits of major companies coupled with low interest rates made it difficult for the bank’s trading unit to report profits. (See also: S&P Lowers Deutsche Bank Outlook To Negative).
The slump in its trading unit can only mean more bad news. The bank has reeled under the combined effects of an economic downturn and business missteps in the last year. Its stock price is down by approximately 36 percent since the beginning of this year. The decline in revenue could also affect its capital ratio. The European Banking Authority recently conducted stress tests to ascertain the capabilities of banks in the region to withstanding a financial crisis. With a capital ratio of 7.8 percent, Deutsche Bank was ahead of Societe Generale which had a ratio of 8.3 percent.
Stress ratio is the amount of capital buffer or amount of capital available to the bank after a shock. U.S. banks underwent similar tests earlier this year. JP Morgan Chase (JPM), the largest US bank by capitalization, would see a 3.7 percentage point drop in the ratio related to its financial health. Morgan Stanley is at the other end of the spectrum with capital ratio of 7.3 percent.
