Deutsche Bank reported net income of €5bn for the year 2009 on Thursday, compared to a €3.9bn loss in 2008.
This, we would say, is a pretty impressive turnaround in anyone’s business.
So what helped Germany’s premier financial institution do so well last year?
Well, for one thing, there weren’t as many writedowns for the bank. But, by the bank’s own admission, there was also a hell of a lot of money to be made from riding flow. In other words market-making, and spread-taking.
As the bank noted on Thursday (emphasis FT Alphaville’s):
In Corporate Banking & Securities (CB&S), fourth quarter net revenues were EUR 2.9 billion, versus EUR 3.7 billion negative in the prior year quarter. Revenues in Sales & Trading (debt and other products) were EUR 1.3 billion, versus negative EUR 2.7 billion in the fourth quarter 2008, primarily reflecting the non-recurrence of losses recorded in Credit Trading of EUR 3.4 billion and mark-downs of EUR 1.7 billion recorded in the prior year quarter.
Current quarter revenues included mark-downs of EUR 204 million, mainly related to provisions against monoline insurers. Revenues in Sales & Trading (equity) were EUR 637 million, versus EUR 2.1 billion negative in the fourth quarter 2008, primarily due to the non-recurrence of losses recognised in Equity Derivatives and Equity Proprietary Trading in the prior year quarter.
Sales & Trading revenues in total were lower than in the third quarter 2009, reflecting seasonal patterns which were accentuated by sustained low volatility, markedly lower client activity in November and December, and continued normalization of margins. Revenues in Origination were EUR 379 million, versus EUR 938 million in the fourth quarter 2008, primarily reflecting the non-recurrence of mark-to-market net recoveries on leveraged loans and loan commitments which occurred in the prior year quarter. Revenues in Advisory were EUR 105 million, versus EUR 152 million in the prior year quarter, reflecting continued low volumes of M&A market activity and some loss of market share.
CB&S full year net revenues were EUR 16.2 billion, after mark-downs of EUR 925 million, versus EUR 428 million, after mark-downs of EUR 7.5 billion, in 2008. This development was due predominantly to strong performance in ‘flow’ trading products and the non-recurrence of the aforementioned trading losses recognized in the final quarter of 2008.
Both factors reflected a successful re-orientation of the sales and trading platform towards customer business and liquid, ‘flow’ products. 2009 revenues additionally benefited from favorable market conditions, including both margins and volumes, particularly in the first half of the year, together with record full-year revenues in Commodities and Emerging Market Debt trading.
So that’s net revenues of €16.2bn in corporate banking and securities after mark-downs of €925m, which compares to net revenues of €428m following mark-downs of €7.5bn the year before.
And here’s the key point.
Deutsche attributes much of that growth to the successful re-orientation of its business towards customer business and liquid, ‘flow’ products. While it’s not broken out within the results, we’re willing to bet that a large slice of that re-orientation was therefore focused on managing flow emanating from the group’s ever growing synthetic exchange-traded-product and foreign exchange businesses — both of which happen to do very well when spreads are wide, and volatility is high.
This would also explain why sales and trading revenues were lower in the fourth quarter compared to the third. As Deutsche itself pointed out, the fall reflected “seasonal patterns which were accentuated by sustained low volatility, markedly lower client activity in November and December, and continued normalization of margins.”
A reminder, under the synthetic exchange-traded product structure, the issuer earns money from both management fees, swap dealing and index arbitrage.