Volatile volatility roils Europe investment banks

Bloomberg

Europe’s investment banks were upbeat after a spike in volatility at the start of the year promised to revive their battered trading units. Their exuberance had disappeared as quickly as it came.
Deutsche Bank AG cautioned that its securities unit was facing headwinds this quarter from a stronger euro and higher funding costs for the business, less than a week after predicting higher full-year trading revenue. Tidjane Thiam, the head of Credit Suisse Group AG who a month earlier declared his investment bank was alive and well, spoke of a “very confused” first quarter that left clients once again sitting on the sidelines.
“January was a strong month, February was strange and March is a bit all over the place,” Thiam summed it up at a Bloomberg event in London.
The comments sent shares of the lenders slumping, with Deutsche Bank approaching the lows during its darkest moments in 2016. Both banks are in the final stretches of multi-year turnaround efforts and have pinned their hopes for a revival of the trading business on a return of volatility, after years of cost cuts. But if volatility had returned this quarter, it wasn’t quite the kind the lenders had hoped for.

MORE VOLATILITY
“On balance we all benefit from a bit more volatility, but if it goes up too much, everyone is suffering,” Marcus Schenck, the co-head of Deutsche Bank’s corporate and investment bank, said at the event. There will be “volatility in the volatility” going forward.
Traders crave volatility, or movements in asset prices, because they spur clients to make bets and hedge their investments. But moves that are too violent or not sustained over a longer periods may not have the desired effect and can catch banks off guard. In late 2014, when oil prices suddenly fell and credit spreads widened, the biggest US lenders were caught wrong-footed by what Citigroup Inc. Chief Financial Officer John Gerspach then called “volatile volatility.”

STOCKS PLUNGE
Volatility returned to markets this February, as US stocks had their worst single-day plunge in almost seven years and 10-year Treasury yields reached the highest level in more than four years. Banks including JPMorgan Chase & Co. and
Citigroup Inc. have forecast higher trading revenue for their first
quarters, which end in March.
Credit Suisse, too, seemed upbeat in February, saying that trading revenue had rebounded at the start of the year along with unsteady markets. However, Thiam cautioned that while there are positive tailwinds from the economy, “people are just sitting on the sidelines” recently.
Thiam, speaking at an investor conference, said revenue in dollar terms at the firm’s global markets business so far is similar to what the bank posted in the first quarter of 2017. “It will be a profitable quarter, but less so than we thought after
six weeks,” he said.

‘THIRD PHASE’
Deutsche Bank had struck an even more optimistic tone just a week ago, when it predicted in its annual report that volatile markets are here to stay and will help it arrest two years of declines at its debt-trading business. The bank’s executives have been pleading with investors for patience, with Chief Executive Officer John Cryan saying in January that his turnaround had entered a “third phase” in which revenue should start to grow again.
Cryan, speaking in Tel Aviv, said that the bank has raised a lot of money and needs to find ways to
deploy it.
While the bank’s full-year forecast is still intact, Chief Financial Officer James von Moltke said at an investor conference in London that the euro’s gain against the dollar will reduce revenue in the securities unit by about 300 million euros ($368 million) this quarter. Meanwhile, higher funding costs will weigh on the unit to the tune of 150 million euros, he said.