Are Deutsche traders trying too hard to recover that lost market share?
Has Deutsche Bank's golden boy from Goldman Sachs become the tiniest bit tarnished? Sam Wisnia, the former Goldman fixed income quant who's risen through the ranks at Deutsche and was made global head of FX and rates trading in only May may have a blemish beside his name. The $60m loss on a U.S. inflation trade reported by Bloomberg falls within his broad remit. There's no indication that Wisnia was directly involved, but it's his division.
The loss comes as Deutsche has been setting out to recover market share in its fixed income trading business. Last September's revelation that the bank was due to be fined as much as $14bn by the U.S. Department of Justice promoted fears over Deutsche's stability. Fixed income sales and trading revenues at the German bank fell 11% last year versus 2015; only Credit Suisse did worse. This year, a newly recapitalized Deutsche has declared its intention of building the business back up again after the bank's market share fell from 14% to 11.5% last year. Revenues accordingly rose 10% year-on-year in the first quarter, but Deutsche was still outshone by rivals like Credit Suisse (up 29%) and RBS (up 75%).
The pressure is therefore on - and all the more so given that the rates business is supposed to be at the helm of this year's recovery. "We expect debt sales & trading revenues to be higher year-on-year with steepening yield curves and diverging monetary policy driving increasing demand for rates products," said Deutsche's first quarter report. It doesn't help that people are leaving - Insiders say Jim McCrindle, a director in U.S. FX sales, just left for BAML. Chief U.S. economist Joe LaVorgna quit yesterday. A job offer to Rob Allard, who was supposed to be joining as head of U.S. fixed income sales, inexplicably fell through.
$60m isn't the end of the world given that the rates business alone has been known to generate €900m ($1bn) in revenues a year. Nor is it entirely clear what went wrong. Deutsche didn't respond to a request to comment, but Bloomberg suggests DB made a wrong bet on bonds linked to inflation. The bank is reportedly examining whether risk limits were exceeded and has escalated the case to its advisory board. However, traders say the real issue is whether the loss relates to a new position - or simply to a legacy position that was repriced.
Either way, the U.S. macro business under Wisnia will need to up its game for the rest of the year. Deutsche's traders received zero performance bonuses for 2016 and the compensatory retention bonuses look like being worthless. Traders at the U.S. bank will therefore want to maximize their bonuses this year. The $60m loss looks like a setback. They have five months to make it up - and to hope they don't blow up again in the process.