Smoke screen

Deutsche Bank’s second-quarter profit surprise

Deutsche Bank US Downgrade
Something up your sleeve, Mr. Sewing? Source: AP Photo/Michael Probst

It was a glimmer of hope for the long-suffering shareholders of Deutsche Bank. One week before it was due to report second-quarter results, Germany’s largest bank came out with an unexpectedly cheery preannouncement on earnings. Within minutes of the statement hitting trading desks, shares in the bank surged nearly 7 percent.

For once, Deutsche has beaten expectations across the board: Group revenues are projected at €6.6 billion ($7.7 billion) for the April-June period (compared to €6.4 billion predicted by analysts) and non-interest expenses at €5.8 billion (analysts: €6 billion). Above all was the profit surprise: Net income was reported at €400 million, compared to forecasts of just €159 million.

But first looks can be deceiving. Look behind the curtain and you will find that the long-hoped-for turnaround at Germany’s largest bank is still more like a smoke screen.

For one thing, Monday’s news has been a game of managing the mood. Bank executives had done everything they could to lower expectations in the last few weeks. At the end of May, CEO Christian Sewing called the earnings situation in its investment banking unit “challenging.” And in early June, CFO James von Moltke said he expected Deutsche Bank to perform worse than its competitors.

Wrong-footing the pessimists

It wouldn’t be the first time Deutsche Bank nudged analysts into a depressing mood, only to – “it’s a miracle!” – positively surprise shareholders down the line. Indeed, the bank has earned something of an inglorious reputation in this regard.

Then again, it’s true that analysts had plenty of pessimism to work with over the last quarter. A series of poor results, errors and bad breaks led to Mr. Sewing replacing John Cryan as CEO at the start of April. After that, rating agency Standard & Poor’s downgraded the bank’s debt and the Federal Reserve gave its US operations a fail grade in its stress tests – the only bank (domestic or foreign) to fail. Last month, the bank’s share price fell to a record low and has hovered close to that mark ever since.

“Management believes that these results demonstrate the resilience of the franchise,” Deutsche Bank said in a statement Monday accompanying its upbeat results. This may be true, but its lackluster performance has also proven resilient. What the bank doesn’t say in its latest release: No progress has been made in its key figures when compared to the same period last year. Net income is stable, even down slightly; costs have risen slightly; revenues are treading water.

A sign of just how dramatically Deutsche Bank has fallen: US rival JP Morgan’s net income of more than €7 billion in the second quarter was higher than Deutsche Bank’s entire company-wide revenue (€6.6 billion). After taxes, Deutsche’s earnings were less than 6 percent of JP Morgan’s. And the US investment bank’s profits are rising to boot, while Deutsche’s remain stable.

So while Deutsche Bank’s figures might offer some brief respite, it would be far too early to talk of a turnaround. The short-term celebration of investors is a sign of just how little they have come to expect – so little, in fact, that a fair amount of the gains were likely the result of short-sellers closing their bets.

Can Mr. Sewing really succeed in stabilizing the bank and leading it to new growth? That’s something he’ll still have to prove in the coming quarters.

Daniel Schäfer is the editor of Handelsblatt’s finance section and is based in Frankfurt. Christopher Cermak adapted this story into English for Handelsblatt Global. To contact the author: 

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