Deutsche hit by €1.7 billion equity derivatives losses in Q4

The corporate banking and securities business sustained particularly heavy losses, with a negative €3.8 billion net revenue recorded for the quarter. Equity derivatives, equity proprietary and credit trading were the prime culprits, contributing to a negative €4.8 billion net revenue for sales and trading.

Equity derivatives losses reached €1.7 billion, attributed to managing structural risks around correlation, volatility and dividends. Equity proprietary trading racked up a deficit of €413 million due to widespread de-leveraging in the market, which reduced convertible values and increased basis risk.

Credit trading losses totalled €3.4 billion. Of this, €1 billion was related to credit proprietary trading, which incurred losses from exposure to the US automotive industry, spiralling corporate and convertible bond prices, and basis widening compared with the credit default swaps used to hedge them. Further mark-downs amounted to €1.7 billion, including €1.1 billion for reserves against monoline insurers and €244 million as provisions against residential mortgage-backed securities. Revenues in origination were one of the few profitable areas, with a year-on-year rise of 84% to €938 million.

Provision for credit losses in Q4 was €591 million, 80% higher than Q4 2007, which included €185 million of loans reclassified under amendments to IAS 39, the International Financial Reporting Standards' rule detailing fair-value accounting.

Deutsche's other businesses maintained positive net revenues for the quarter. Private clients and asset management achieved net revenues of €2 billion, although this was a year-on-year decline of 22%. Meanwhile, global transaction banking recorded a year-on-year increase of 14%, with net revenues of €751 million.

The bank's Tier I capital ratio stood at 10.1% at the end of the quarter, down from 10.3% in Q3. Total assets rose to €2,202 billion from €2,062 billion in the previous quarter, while positive market values from derivatives increased from €727 billion to €1,224 billion as a result of market volatility and interest rate movements.

"We are very disappointed at our fourth-quarter result and at the consequent full-year net loss in 2008. Operating conditions were completely unprecedented, and exposed some weaknesses in our business model. We therefore are repositioning our platform in some core businesses," commented Josef Ackermann, chairman of the board at Deutsche Bank, in a statement. On January 14, Ackermann detailed the bank's retrenchment plans: "We have substantially reduced our exposures in leveraged finance, commercial real estate and other key credit market exposures, and expect no further material negative impact from these areas. We have scaled back or exited trading strategies most affected by market turbulence. We have significantly reduced trading assets, and thus reduced balance sheet leverage."

See also: Deutsche Bank expects €4.8 billion Q4 loss
Deutsche's equity derivatives heads leave