Deutsche Bank Growth Still Elusive as CEO Delivers on Costs

(Bloomberg) -- Deutsche Bank AG Chief Executive Officer John Cryan is getting no closer to delivering the growth investors are craving.

The Frankfurt-based lender on Thursday reported a 30 percent slump in third-quarter trading revenue, twice as much as the decline at its U.S. peers. The drop drove a third straight quarter of revenue contraction at Europe’s largest investment bank and overshadowed a surge in net income.

“These aren’t the kind of numbers you want to keep seeing,” said Markus Riesselmann, an analyst at Independent Research in Frankfurt who recommends investors buy the shares. “The longer this goes on, the harder it gets to believe management’s hopes for a recovery. We cannot see another two or three quarters like this.”

Cryan, 56, has struggled to deliver on a pledge made in March, when he unveiled the bank’s third strategy in as many years, to return to “controlled” growth. While he settled legacy misconduct cases, reduced risk in the securities unit and raised fresh capital, the bank hasn’t won back all clients who reduced business last year. That’s made an industry-wide slump in trading worse for Germany’s largest lender and prompted some investors to say they may stop backing Cryan unless they see progress by next year.

“There are some positive signs that we are heading in the right direction,” said Cryan in a memo to staff, highlighting that net income beat analysts’ estimates thanks to lower costs. “We can perhaps be less satisfied with our revenues.”

Investor Pressure

Deutsche Bank shares fell 1.9 percent at 11:55 a.m. in Frankfurt. They have lost 7.3 percent this year, the fourth-worst performance among the 44 members of the Bloomberg Europe 500 Banks and Financial Services Index.

Barclays Plc, the bottom performer in the index, on Thursday reported the worst markets results in CEO Jes Staley’s two-year tenure, as revenue from trading trading stocks, bonds and currencies plunged 31 percent. The stock fell as much as 7.1 percent, the most since the aftermath of the Brexit vote.

Three of the 10 largest stakeholders in Deutsche Bank, speaking earlier this month on condition of anonymity, said they want to see a turnaround in the next few quarters, particularly in the trading business, to continue to back Cryan. Revenue has fallen in all but two quarters since he took over in mid-2015, and declined 10 percent in the third quarter, to 6.78 billion euros.

Cost Cuts

While top-line growth remains elusive, net income more than doubled to 647 million euros ($766 million) as litigation expenses declined 72 percent. Headcount declined by about 4,000 over the past 12 months, with the impact on costs partly offset by higher accruals for variable compensation as the banks seeks to attract talent following the biggest bonus cuts in its recent history. Overall, non-interest expenses fell by 14 percent.

Cryan said a plan to sell parts of the asset management business and combine the bank’s consumer banking units remains on track. Deutsche Bank will integrate its Postbank retail business with its private and commercial bank by the end of the second quarter, though both brands will continue to operate. It will also absorb Sal. Oppenheim’s wealth management business in the first quarter and that the brand will cease to exist. Cryan said the bank was unable to restore the brand’s strength after acquiring it.

The asset management unit attracted 4 billion euros of net new assets, mainly driven by liquidity product inflows in the Americas and Germany. IPO plans for that unit remain “well within” the original timeline, which called for a share offering by early 2019, James von Moltke, the bank’s chief financial officer, said in an interview.

Goldman Hire

“We’re satisfied to see the restructuring process moving ahead with the plans for the asset management unit and Postbank integration. Costs are also coming down, both in terms of legal cases and their operating base,” said Ingo Frommen, an analyst at Landesbank Baden-Wuerttemberg who has a hold recommendation on the shares. “That’s all good, but it is too early to say we’re seeing a complete turnaround.”

Fixed income and currencies, the biggest source of trading revenue, fell 36 percent to 988 million euros in the quarter, and will be down for the full year of 2017 as the challenging environment continues, the bank said. The five biggest U.S. investment banks saw debt trading decline 22 percent in the quarter. Deutsche Bank moved some financing business from fixed-income trading to another unit. The drop in revenue would have been 24 percent if adjusted for that change.

To boost trading, the lender this month hired Paul Huchro, a former Goldman Sachs Group Inc. partner, out of retirement to head major parts of corporate-credit trading. Over the past 18 months, Deutsche Bank hired about 40 recruits in European and U.S. investment grade bond sales, trading and research.

The two co-heads of the investment bank, Marcus Schenck and Garth Ritchie, are seeking to win back clients who reduced business with the bank late last year amid speculation about its financial strength. They’re focusing the division on corporate clients while preparing to move assets and hundreds of traders from London to Frankfurt in anticipation of the U.K.’s departure from the European Union.

Equities trading was down 16 percent, compared with a decline of 0.5 percent at the U.S. banks. Deutsche Bank this month was left holding millions of dollars in stock of Osram Licht AG, after failing to find enough buyers for a stake that Siemens AG sold in the company.

To contact the reporters on this story: Steven Arons in Frankfurt at sarons@bloomberg.net, Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net.

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Christian Baumgaertel, Cindy Roberts

©2017 Bloomberg L.P.