Deutsche Bank faces possible $60 million derivative loss

Bloomberg

Deutsche Bank AG, the German lender seeking to overhaul how it manages risks, made a bet on US inflation that puts the firm on course to lose as much as $60 million, people familiar with the matter said.
The trade used derivative products tied to US inflation, said the people, who requested anonymity because the details aren’t public. The Frankfurt-based lender has been examining whether Deutsche Bank traders breached risk limits on the deal, some of the people said. The case has been escalated to the bank’s supervisory board, one person said.
Chief Executive Officer John Cryan has been trying to improve the lender’s risk and operational controls that have drawn scorn from regulators around the world. A risk limit violation could indicate a weakness in the bank’s oversight of its traders in a business that earned about $270 million in the first quarter. Just two months ago, the Federal Reserve fined the firm for failing to ensure that traders abide by the Volcker Rule, a US law that restricts lenders from using their own funds to make speculative trades.
“If it is true that a single trade could cause such a loss at Deutsche Bank, then this would be a clear setback to Cryan’s efforts to improve controls,” said Michael Seufert, an analyst with NordLB who has a sell recommendation on the stock. “He has vowed to end such control failures.”
An official for Deutsche Bank in New York declined to comment.
Deutsche Bank made the trade in anticipation of how clients were going to transact and isn’t expecting the bet to reverse, one of the people said. Inflation traders buy and sell bonds linked to inflation, such as Treasury Inflation-Protected Securities, and other derivatives such as options.
In a separate case, the bank last year began a review into whether it misstated the value of derivatives used to bet on inflation, known as zero-coupon inflation swaps. The bank shared its findings with US authorities, Bloomberg reported.
The German lender’s fixed-income pretax profit was driven by 2.3 billion euros ($2.6 billion) in revenue in the first quarter, an 11 percent increase on the year earlier. Revenue from products tied to interest rates was ‘significantly higher,’ Deutsche Bank said.

Morley to bolster Deutsche’s wealth unit
Deutsche Bank AG hired Michael Morley, a former chief executive officer at Coutts, to head the wealth management unit’s U.K. operations as it seeks to boost the number of rich clients the firm serves there.
The Frankfurt-based lender wants to tempt clients away from banks who may have difficulties providing services in the European Union from Britain and vice versa after Brexit, Fabrizio Campelli, Deutsche Bank’s global head of wealth management, said in an interview. To do that, the unit is planning to consolidate its U.K. wealth management operations into a single legal entity ahead of the country’s exit from the political bloc, he said.
The new set-up will enable Deutsche Bank to “take advantage of the risk others are facing,” the 44-year-old Italian said. Clients being able to do business in both jurisdictions without facing a clunky experience will be key after Brexit, he said.
Deutsche Bank Wealth Management’s invested assets plunged 26 percent last year to 216 billion euros as clients were spooked by news around the bank, which agreed to settle a U.S. mortgage probe for $7.2 billion in December. Net asset flow at the unit turned positive in the first quarter of this year and Campelli plans to hire about 100 client-facing staff over the next 18 months across Asia, Europe and the U.S. to boost the money it oversees.
“The volumes that have come back have been very material,” Campelli said. “Our clients are not concerned anymore.”
Morley, 60, is the first hire in the expansion strategy, which should enable the unit to grow faster than the wider markets where it operates, Campelli said. He declined to provide specific targets.
“London will continue to prosper as an important convening center for international private client capital” despite Brexit, Morley said in a statement. He will report to Europe, Middle East and Africa wealth management head Peter Hinder.
“The U.K. is at the heart of the significant investments we are making,” Campelli said in the statement. “This is just the start.”