Deutsche Bank Falls After Missing Out on Rally That Lifted Peers

(Bloomberg) -- Deutsche Bank AG’s reliance on debt trading became ever more apparent in the third quarter as an industrywide slump in that business weighed on results.

The German lender posted a smaller jump in dealmaking fees than its U.S. rivals and its previous exit from stock trading caused it to miss out on a rally that lifted revenue at peers. That meant a 12% slide in the fixed-income business led to a drop in revenue and profit at its investment bank in a quarter when UBS Group AG and Barclays Plc reported gains. Shares fell as much as 5.5%.

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The results underscore urgency for Chief Executive Officer Christian Sewing to come up with alternative sources of growth, after relying on a boom in fixed income for much of his turnaround so far. But the lending businesses that were initially at the center of his strategy are still suffering from negative interest rates. Unexpected expenses, meanwhile, have forced the CEO to scrap the cost-reduction targets for this year and next, and prompted the bank to book a 583 million-euro transformation charge in the quarter.

While the German firm’s fixed-income traders held up better than many competitors and it raised the full-year outlook for the investment bank slightly, its shares fell as lower provisions for bad loans explained much of why third-quarter profit beat estimates.

“Deutsche Bank has reported another solid quarter,” analysts at Citigroup Inc. led by Andrew Coombs wrote in a note, pointing to a beat on pretax profit. “However this is primarily the function of lower loan losses.”

Deutsche Bank fell 5.3% at 10:35 a.m. in Frankfurt trading, leading European lenders lower. The stock is still up 26% this year.

Spain’s Banco Santander SA also fell on Wednesday, declining 2.2%, even after saying it would “significantly” beat its profit target for this year. Bank stocks had been gaining in the days before as earnings at rival lenders UBS and Barclays fueled optimism about the industry.

The drop in fixed-income trading at Deutsche Bank compares with an average decline of 13% at the five biggest U.S. investment banks. Earnings from advising on deals and capital raisings rose 22%, compared with more than 50% at the U.S. banks. Sewing exited equities trading two years ago as part of his overhaul. Wall Street peers on average posted gains of 35% in that business.

Other key figures

Deutsche Bank’s fixed-income traders had outpaced Wall Street in the four previous quarters, suggesting the lender has been winning back market share after almost half a decade of steady declines. While those results were boosted by one-off gains such as successful bets by the distressed debt team, the third-quarter results suggest it’s consolidating its position.

But the corporate-banking unit and the retail division both once again failed to grow as negative interest rates continued to weigh on the businesses that Sewing once put at the heart of his strategy. The CEO said in a memo to staff that “the foundation for future growth” had been laid in the corporate bank while also pointing to increasing profitability in the retail division.

In a presentation, Deutsche Bank said that revenue overall was “developing in line with or better than previous 2022 ambitions” and that it’s “positioning for meaningful capital returns to shareholders starting in 2022.” The lender set aside 641 million euros in the first three quarters of 2021 for dividends to be paid next year.

After hiring senior bankers and adding new trading businesses, Deutsche Bank on Wednesday predicted a “slight improvement” in investment-banking revenue this year.

“Client engagement was high and increased as the quarter went on” in debt trading, Chief Financial Officer James von Moltke said in an interview on Bloomberg TV. “So we’re quite optimistic actually about our ability to carry some of that momentum forward.”

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