vicious circle

Deutsche Bank improves costs but weak revenues disappoint investors

FILE PHOTO: The Deutsche Bank headquarters are seen in Frankfurt
Dark times persist. Source: Reuters

Deutsche Bank’s new chief executive, Christian Sewing, was true to his word in reducing costs in the third quarter. However, surprising downturns on the revenue front have analysts wondering whether Germany’s largest bank can reverse its dismal fortunes and reach its profit goals.

The bank shaved overall costs of €5.6 billion as well as the costs of restructuring and legal actions by 1 percent. Restructuring costs, including severance packages, will total €600 million instead of the €800 million originally projected.

Investors expressed their disappointment by marking the stock down 5 percent, at one point flirting with the all-time low of €8.76 before closing at €8.87.

But declines on the revenue front exceeded analysts’ forecasts and even areas projected to gain lost ground. Overall, net revenue declined 9 percent to €6.2 billion, 1.4 points below expectations. Revenues now are expected to show a slight decline for the year instead of remaining stable as originally predicted.

CIB is Achilles’ heel

Corporate and investment banking led the decline with 13 percent, compared with forecasts of a 5-percent decline, as all sectors lost ground. The core sales and trading activities were down 15 percent. US and British competitors also saw trading revenues decline, but they were able to offset the downturn with gains elsewhere.

“Revenue at the corporate and investment bank remains the Achilles’ heel for Deutsche Bank,” said analysts at BayernLB.

But the 5-percent decline at the global transaction bank also surprised analysts, who had expected a small gain in this department. The bank’s CFO, James von Moltke, said even management was “somewhat surprised” by the decline.

Deutsche last week made Stefan Hoops, formerly co-head of institutional and treasury coverage, the head of the transaction business. Mr. Sewing has pinned hopes on the division to help power the bank’s recovery.

The progress on cutting costs enabled the bank to beat analysts’ expectations on earnings, however. Pretax profit for the quarter came in at €506 million, a decline of 46 percent from the year-ago period but ahead of the €328 million forecast. But even that prompted disgruntlement in some quarters.

“Deutsche Bank’s results are only superficially above expectations,” commented one fund manager, who complained most of the cost savings came in the restructuring costs and not the long-term cost structure of the bank.

Nonetheless, Mr. Sewing predicted the bank would be able to report a profit for the year, its first since 2014.

DWS continues to lose funds

Separately, Deutsche’s fund management group, DWS, which was listed on the stock exchange earlier this year, also reported lower costs. CFO Claire Peel said the group cut costs by 5 percent to €398 million in the third quarter, bringing it close to its target for the year.

Adjusted pretax profit was up 15 percent to €177 million. DWS stock, which has lost a quarter of its value since the March listing, gained 3 percent on the news.

But the other side of the ledger was far less satisfying as investors continued to take out money, for a net withdrawal of €2.7 billion. The high-margin actively-managed funds were particularly hard hit, but even the low-fee exchange-traded funds barely kept even. So far this year, net withdrawals from DWS funds have totaled €15 billion.

The larger question for Deutsche Bank, and investors, remains whether the institution can reverse its fortunes. The bank lacks projects to generate growth. Mr. Sewing is making progress but there is no sign yet that these cuts will eventually heal the patient and return it to rude health.

Yasmin Osman, Andreas Kröner, and Anke Rezmer cover banking and financial services for Handelsblatt. Darrell Delamaide adapted this story into English for Handelsblatt Global. To contact the authors: osman@handelsblatt.com, kroener@handelsblatt.com, and rezmer@handelsblatt.com.

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!