Battling Back

Deutsche Bank’s austerity gradually bearing fruit

Deutsche Bank AG Chief Executive Officer Christian Sewing Attends Annual General Meeting As Lender Announces 7,000 Job Cuts
The cuts are working. Please let it be true. Source: Bloomberg

Deutsche Bank’s path to profitability remains a long and rocky one, but the cutbacks imposed by new CEO Christian Sewing in the four months since he took over are starting to bear fruit. His focus is on iron austerity and a close look at the second-quarter results released on Wednesday show that the monolith of costs at Germany’s largest bank is finally starting to crumble a little.

At €5.8 billion ($6.8 billion), the bank’s total costs were slightly above the year-earlier level. But that was in part due to an increase in restructuring costs linked to savings. Costs were down 1 percent when adjusted for extraordinary effects such as legal risks, restructuring and write-downs.

That’s not much for an efficient bank, but it’s an important step forward for Deutsche. “The trend in costs is going in the right direction,” Mr. Sewing, who plans to shed at least 7,000 jobs by the end of 2019, told analysts.

To be sure, the cost cuts are good news. “The bank’s ability to deliver its profitability goals rises and falls with costs,” said one analyst during the bank’s conference call on Wednesday. But on the income side, the second quarter looked familiarly bleak.

A familiar earnings story

Earnings and revenue were better than expected, with net profit at €401 million, down from €466 million and revenue flat at €6.6 billion. But Deutsche Bank had already released those figures last week. At the time, its share price rose because the profit decline was limited to “just” 14 percent. The detailed results released on Wednesday failed to impress traders, and shares in both Deutsche Bank and its fund unit DWS fell by just over 1 percent.

Earnings from securities trading continued to erode while the big US rivals again raked in hefty profits in the second quarter. Gross income, adjusted for extraordinary effects, was down 8 percent – and that wasn’t just because of declines in equity and fixed-income trading.

Mr. Sewing wants to reduce the bank’s dependence on volatile businesses but that’s no guarantee of success, as the results showed. The more stable retail banking division for example only grew thanks to extraordinary effects. And DWS, the fund management arm that was once a secure source of income, sustained a surprise drop in earnings.

Deutsche Bank “has done excellent work with regard to the equity capital ratio and the leverage ratio and the cost reductions are running as planned,” JP Morgan banking analyst Kian Abouhossein wrote. But he added that the bank has yet to prove it can implement its major restructuring. It hasn’t always realized its plans in the past and is now, once again, under new management.

Revenues in investment banking continued to fall in the second quarter, with a 17 percent drop in the important fixed income sales and trading segment.

But in equities sales and trading, revenues were down just 6 percent, which is manageable considering the bank plans to cut one in four jobs in that segment. In the first three months, its revenues had fallen by 21 percent.

The bank has largely completed its cutbacks among sales staff. “Employees can now concentrate on their customers again.” said Mr. Sewing.

DWS becoming a trouble spot?

Fund manager DWS, meanwhile, disappointed investors with net fund outflows of €4.9 billion in the second quarter after a fall by €7.8 billion in the first three months. That has prompted DWS to abandon its target of achieving a net funds inflow of 3 to 5 percent.

“Given the volatility and the sentiment in the capital market it’s unlikely that we will reach our target for 2018 net funds,” said the unit’s finance chief, Claire Peel. “But we are sticking to our medium term goals in this regard.” DWS wants funds to grow 3 to 5 percent every year.

The fund manager’s margins fell slightly but remained just above its target of 0.3 percent. That didn’t help pretax profit, which shrank by 40 percent year-on-year to €149 million.

Like Deutsche Bank, the weak earnings overshadowed the division’s pledge to deliver 20 to 30 percent of its planned medium-term cost savings of €125 to 150 million this year.

If Deutsche Bank is truly to turn a corner after a rough few years, it’s going to have to shift from merely cutting costs to boosting earnings.

Yasmin Osman is a senior financial correspondent for Handelsblatt based in Frankfurt. David Crossland adapted this article into English for Handelsblatt Global. To contact the author:

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