When Germany’s largest lender presented its first-quarter earnings on Thursday, it declared a profit that more than doubled in the first three months of the year, but investors nevertheless sent shares down some 3 percent. They are worried over Deutsche Bank’s declining revenues which cast doubts over Chief Executive John Cryan’s pledge last month to focus on growth.
Mr. Cryan and supervisory board Chairman Paul Achleitner are likely to face tough questions by shareholders at the annual general meeting in mid-May. Stockholders expect the bank to switch as quickly as possible from crisis mode back to growth, following a series of legal woes that threatened to taint the lender’s image.
The first sign of trouble came Friday: Handelsblatt has learned that the influential shareholder advisor Glass Lewis is set to recommend a vote of no confidence in the bank’s executive and supervisory boards at the annual meeting on May 18. While transparency has improved under Mr. Cryan, Glass Lewis argues the legal woes of the past still indicate a widespread failure in leadership.
That failure extends to the bank’s growth prospects. At first glance, the first-quarter earnings looked quite positive with a 52-percent hike in net profit to €571 million ($621 million) – a figure that beat expectations. But revenues in the first three months of 2017 fell 9 percent to €7.3 billion, below the €8 billion analysts had hoped for on average. “The results are disappointing, due to the weakness on the income side,” Kian Abouhossein from JP Morgan wrote in a note.
Mr. Cryan, in a letter to his employees on Thursday, admitted that the bank had to do more to return to growth. “We can finally focus on continuing the disciplined restructuring of our bank and position ourselves for prudent growth,” Mr. Cryan wrote. “Our financial results for the first three months clearly show how important it is to do more in this respect.”
Deutsche Bank last month announced a capital increase and said it collected €8 billion ($8.7 billion) by issuing some 690 million new shares – money it said would be used to implement a new growth strategy.
The rise in profits at Deutsche Bank was in fact largely due to the bank’s cost-cutting efforts. Costs that are not linked to interest rates fell significantly by 12 percent in the first quarter, for which the bank earned unanimous praise.
But the income slump spells trouble for the bank, as shareholders are focused on the question whether it will manage to regain its footing following the turbulent events of last October, when an impending fine of billions from the United States justice department led to doubts about the bank’s stability. Lack of trust ultimately prompted customers to withdraw billions from the bank and avoid doing business with it.
Mr. Cryan pointed out that customer business was performing very well and that all divisions of the bank were recording inflows. But analysts didn’t take the bait. “The bank is playing second fiddle in all areas of business, because American banks have exploited Deutsche Bank’s weakness in investment banking and Swiss banks have done the same in asset management, for example, and they have significantly increased their lead,” said NordLB analyst Michael Seufert.
Wall Street banks in fact have reported big gains in bond trading, taking advantage of investors changing their strategies in the light of interest rate movements, a series of elections in Europe and Britain’s departure from the European Union.
“The bank is playing second fiddle in all areas of business, because American banks have exploited Deutsche Bank's weakness in investment banking.”
Deutsche Bank had scaled down its bond trading division as part of a strategic overhaul to simplify its business and as a result cut ties with thousands of clients. While the German lender reported an 11-percent revenue increase in first-quarter bond trading, results paled besides its U.S. peers, with Wall Street banks on average reporting a 21-percent rise, according to news agency Reuters.
“The market could interpret this as meaning that Deutsche Bank has lost further market share,” warned Philipp Hässler at Equinet Bank.
Pre-tax income in the bank’s global trading division overall dropped nearly 40 percent to €240 million and the German flagship lender also said that sales in equity trading were down 10 percent.
“In the coming quarters, we will judge Deutsche Bank by the extent to which it regains market share in investment banking and whether it manages to avoid the loss of key employees,” said Ingo Speich, a fund manager at Union Investment. “This is obligatory, because investment banking is the most important source of earnings for the bank.”
Neil Smith, an analyst at Lampe Bank, believes there are good reasons why U.S. rivals are so far ahead. “It reflects the expectation that the return on equity at German banks will be below the EU-wide average for the sector in future,” he said. Ingo Frommen, a banking analyst at Landesbank Baden-Württemberg, added: “Many banks aren’t even earning their cost of capital at present, which is likely to remain the case for the foreseeable future.” Mr. Smith is optimistic, however, and expects the gap in valuations to narrow over the next few years.
Investors’ distrust of the bank becomes clear if one looks at its price-to-book (P/B) ratio, which compares the market value of the bank’s shares with their book value. If this figure drops below 1.0, it indicates that investors perceive deficits at a company. Although this figure has fallen to well below 1.0 at European banks in recent years, it has since recovered at many institutions. Spain’s Santander now has a P/B ratio of around 1.0, while US banks such as Goldman Sachs, JP Morgan and Morgan Stanley even have market values that exceed their book value. Deutsche Bank’s current P/B ratio is just 0.4; only institutions such as German bank Commerzbank and Italy’s UniCredit have similarly poor ratios.
But despite criticism from analysts and investors, Mr. Cryan advised employees in his letter to concentrate on the areas where the bank has been successful. Deutsche indeed has made progress in dealing with its most dangerous legal risks. After major settlements were reached in a dispute over U.S. mortgages and in the money-laundering scandal in Russia, provisions for old liabilities now total €3.2 billion, with the figure expected to remain stable.
The mood among employees also seems to have improved since the shock of last fall. “Colleagues are reporting bit by bit that we are winning back customers. The capital increase and the figures are being seen as a glimmer of hope that a fresh start could be possible,” a long-serving Deutsche Bank employee told Handelsblatt.
Michael Maisch is the deputy chief of Handelsblatt’s finance desk and based in Frankfurt, Germany’s financial capital. Yasmin Osman is a financial editor with Handelsblatt’s banking team in Frankfurt. To contact the authors: firstname.lastname@example.org , email@example.com