Deutsche Bank shares tumbled 4% on Thursday after reporting better than expected earnings, driven by provisions and dramatic cost-cutting, more than offset however by a sharp drop in overall company revenue which slumped to the lowest in three and a half years, as Investment Banking revenue slumped 16%, while FICC tumbled a whopping 12% Y/Y and 30% Q/Q, with CEO John Cryan taking a page out of the Goldman playbook and blaming "muted client activity." The biggest German bank said Thursday net income was stronger than expected €466 million ($548 million), compared with €20 million for the same period a year earlier, while Q2 pretax profit was €822 million, beating estimates of €717 million. DB companywide revenue of €6.616BN declined 10% from last year's €7.146BN, missing consensus estimates. Its non-interest expenses last year were down 15% from a year ago. Profit was modestly boosted by lower provisions for credit losses, which fell 70% from a year earlier, as well as a 6% decline in adjusted costs. That’s better than analysts had expected, according to Morgan Stanley, which called the results “mixed” in a note to clients.
The report dragged DB shares lower as much as 4.7%, the biggest drop since March 6, and were trading just shy of €16 last. Investors were most concerned by the poor business performance as Deutsche's biggest division, investment banking, suffered worse-than-expected revenue declines in most key areas, from securities trading to trade financing.
Chief Executive John Cryan said “muted client activity in many of the capital markets” hurt the lender. That's one way of putting it; another was bloodbath as net revenues were down as follows:
* 16% in investment banking, which includes deal-advising, securities issuance and trading.
* 7% in private and retail-banking
* 4% in asset management
Having hobbled its trading group in recent years with mass terminations and lack of trader bonuses, the results, or lack thereof, finally emerged today as Europe's largest bank posted dismal results in what was once its strongest division. Overall trading revenue across debt, interest rate products, currencies and equities was down 18% last quarter. The fixed-income piece of that business, the most important for Deutsche Bank, performed roughly in line with big U.S. rivals during what was broadly a rough quarter for debt trading. Deutsche Bank’s fixed-income trading revenue was down 12%. However, unlike U.S. banks, Deutsche Bank failed to get a boost from clients’ stock-trading the WSJ reported, and as a result the German bank’s equities-trading revenue fell 28% from a year earlier.
The CEO scaled back the debt trading business since taking over in 2015, and made efforts to improve controls and compliance after losses and misconduct fines. But problems with the bank’s risk management practices resurfaced last month when its traders were on course to lose as much as $60 million in a wrong-way derivatives bet on inflation.
“In equities we’ve lost a bit of market share and we’re down quite a bit,” Cryan said in the interview. “We need to invest in technology. We’ve let it slip a little bit.”
Adding insult to injury, the bank said that litigation expenses will probably rise in the second half of the year, the bank said. Several other cases are still pending for the German lender, most importantly a U.S. probe into its role in helping clients move about $10 billion out of Russia in so-called mirror trades. The bank is also facing pressure in the U.S. to disclose details about more than $300 million in loans it made to President Donald Trump for real estate projects.
According to the bank, not enough hedge funds and other clients have come back to the bank after a rocky 2016 to generate the volume of business it had a year ago. And the clients who have returned aren’t paying enough fees to make up for the exodus.
”It’s taking Deutsche Bank longer than expected to regain market share,” said Markus Riesselmann, an analyst with Independent Research who has a buy recommendation on the stock. ”But lower credit loss provisions and progress on cost cuts helped the bank achieve a better-than-expected profit.”
There was some hope: Deutsche said clients continued to return last quarter, bringing €9 billion in net inflows across the retail and private bank, wealth management and asset management, a welcome improvement from this time last year, when clients were pulling money and business over concerns about big legal charges and its capital cushion.
The dreadful performance comes at a sensitive time for CEO John Cryan: DB is going through its second major restructuring in less than two years, recombining its investment bank and trading divisions and folding in a German retail-banking business, Postbank, that it had intended to sell. It is now integrating Postbank and has closed hundreds of bank branches as part of broader cost-cutting moves. The big miss also comes just weeks after Deutsche Bank brought on a new chief financial officer, former Citigroup Inc. Treasurer James von Moltke. Ex-banker-turned-CFO Marcus Schenck is now overseeing the recombined investment bank along with trading-unit chief Garth Ritchie.
Cryan is in the process of cutting about 9,000 jobs and has a target of reducing costs by some 3 billion euros by 2021. Headcount declined by 1,525 during the quarter, and is down 4,656 from a year earlier, to 96,652 at the end of June. The bank has recently started to fill some staffing holes, particularly in its corporate finance franchise and its wealth management unit.
# While it is unclear if today's poor earnings have assured that yet another CEO replacement is in DB's immediate future, one thing that is certain is that Deutsche Bank's peer banks took a certain satisfaction in slamming it this morning. CREDIT SUISSE (underperform);
- Says investors will be disappointed by revenue weakness
- Revenue miss is offset by lower charges
- Revenue missed in FICC and Equity trading and IBD
- FICC revenue fell 34% q/q and 12% y/y to EU1.13b vs consensus EU1.25b
- Equity revenue fell 22% q/q and 28% y/y yo EU537m vs consensus EU684m
-IBD revenue fell 14% q/q and 7% y/y to EU563m vs consensus EU599m