Is Deutsche Bank's Huge Forex Business in Trouble?

Foreign exchange markets have been placid overall, and trading returns are dropping. Is this the new normal, or is a correction imminent?

Apr 16, 2014 at 9:58AM

Source: Flickr / Philip C.

Despite foreign exchange markets in developed currencies enjoying a period of relative calm, Deutsche Bank (NYSE:DB) -- the largest player in foreign exchange with a market share of 15.2% -- has been hit with losses as a result of unpredictably volatile emerging market currencies. Should we buy that this may just be a temporary lag in performance, or will it be the new normal?

The Case of Deutsche Bank
In 2013, Deutsche Bank suffered a 16% drop in revenues in its Markets division -- which includes structured products, sales, and trading in a variety of areas, including forex -- due to a difficult trading environment. Assets in the bank's Corporate Banking & Securities Division -- which includes both the Markets and Investment Banking operations -- fell 12% overall. These are obviously aggregate numbers, but the bank's annual report is at pains to point out that declines in forex revenues were due to "margin compression and lower market volatility."

Is This the New Normal?
A few commentators have argued that, rather than monetary policy, it's the trading scandals and regulators that have fundamentally changed the way currency markets operate. Steve Barrow of Standard Bank argues that new limits on communications between traders has cut them off from information about order flows, which in turn reduces trading volume and overall volatility.

In this vein, one could point out that the loss of top traders on foreign exchange desks has also probably had an impact. Though only about two dozen traders have been dismissed or suspended so far, these people represented a major source of specialized knowledge and activity. Deutsche Bank's recent suspension of another top currency salesperson is simply a continuation of a trend -- perhaps without the "stars" of forex, the show is going on, but only glumly.

Or Will There Be a Correction? 
Other (or, most really) observers believe that monetary policy is at the root of the market's strange state. In this case, overall volatility will jump back up as soon as interest rates go up. This would be good news for those that make their money by trading -- at least to the extent that they do, in fact, make money.

From the perspective of someone looking at Deutsche Bank, it's a rather interesting question. Trading has been falling somewhat out of favor recently among the large banks (hardly surprising), but if market conditions grow more appealing, then maybe it will get its groove back and retake the throne atop the commercial banking hierarchy. Or maybe the world really has changed, and forex along with it.

For now, I'm waiting to see how Deutsche Bank and its colleagues respond to this ongoing market environment, and am watching with interest any resource shifts over the coming year. Maybe such moves won't tell us where the market is going, but it'll certainly give an idea of where the banks' strategies are headed.

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Anna Wroblewska has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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