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Deutsche Bank Trading Surge Gives Comfort Six Months Into Revamp

Deutsche Bank Rides Fixed-Income Trading Gain in Boost to Sewing

(Bloomberg) --

Six months into Christian Sewing’s historic restructuring of Deutsche Bank AG, the chief executive officer is finally catching a break.

Germany’s largest bank on Thursday reported a 31% surge in fixed-income trading, and inflows at its asset management unit, giving comfort to investors after a bigger-than-expected loss last quarter. While the transaction bank at the heart of the CEO’s new strategy and German retail both saw lower revenue, shares of the lender reversed initial losses to extend this year’s rally.

Deutsche Bank Trading Surge Gives Comfort Six Months Into Revamp

Sewing last year refocused Deutsche Bank on the business of lending to corporations and individuals, only to be forced to lean more on traders again when hopes for higher interest rates didn’t materialize. The trading rebound suggests the investment bank may finally be halting a slide in market share, even as weakness at the two key pillars of the CEO’s strategy may complicate the turnaround.

“A mixed set of results,” Citigroup Inc. analysts including Andrew Coombs wrote in a note. The “‘investment bank and asset management are ahead,” they wrote, but the “corporate and private bank are a miss.”

Deutsche Bank rose 3.4% at 1:23 p.m. in Frankfurt trading, reversing losses of as much as 2.9% earlier in the day. The stock has gained 19% this year, the best performer in an index of European lenders. If the shares stay higher, it would be the first time in three years that Deutsche Bank rallies on earnings day.

Deutsche Bank Trading Surge Gives Comfort Six Months Into Revamp

The volatile market reaction, on a day when banks were broadly down, underscores the uncertainty that still surrounds Deutsche Bank’s future, and there were plenty of disappointments in Thursday’s release. The transaction bank, which is central to Sewing’s new focus on serving corporate clients, saw revenue decline about 6% to 942 million euros, while German retail income was 7% lower at 1.21 billion euros.

Deutsche Bank also booked transformation charges of 608 million euros in the fourth quarter as well as restructuring and severance expenses of 473 million euros. For the full year, it reported a shortfall attributable to shareholders of 5.72 billion euros, the fifth straight year it ended up in the red. Combined losses now amount to 15 billion euros. By comparison, JPMorgan Chase & Co. posted a profit of more than $36 billion last year.

Deutsche Bank Trading Surge Gives Comfort Six Months Into Revamp

But the better-than-expected performance in fixed-income trading at Deutsche Bank eased a key concern for investors, because it suggests the business -- still one of the biggest revenue contributors -- may be stabilizing after a series of cutbacks in the past years. The unit moved to the forefront of Sewing’s restructuring plan late last year as low and negative interest rates hamper efforts to make more money from lending.

The results give a first glimpse of how the large European investment banks did last quarter. UBS Group AG, the first of the European firms to report earnings, saw debt trading increase about 16% last quarter, but it has a much smaller fixed income operation than Deutsche Bank.

Here are some of other highlights:

  • Core revenue increased 5% to 5.29 billion euros
  • CET1 ratio unchanged at 13.6%
  • 4Q net loss 1.52 billion euros; estimate 1.04 billion euros
  • 4Q net loss attributable to shareholders 1.6 billion euros

Deutsche Bank’s trading rebound couldn’t quite keep up with the five biggest U.S. investment banks, which posted combined gains of more than 60% last quarter. Ram Nayak, who oversees fixed income trading at Deutsche Bank, said that’s because the U.S. results were driven by buying and selling of government bonds, known as rates trading, as well as securitized products, areas Deutsche Bank has cut back or exited.

“We have an excellent U.S. rates offering and a strong U.S. client franchise but it is materially smaller than our U.S. peers –- by design,” Nayak said. “Our market share is definitely beginning to stabilize and come back. You can see that in our client volumes.”

Deutsche Bank Trading Surge Gives Comfort Six Months Into Revamp

In another positive note, finance chief James von Moltke suggested the bank was continuing to benefit from the strong environment of the fourth quarter.

“The market conditions, generally speaking, have continued that favorable trend,” Chief Financial Officer James von Moltke said in an interview. “We’re cautious about predicting a quarter when you’re a month in, but we are gratified to see that the markets and our businesses carried their momentum into 2020.”

In asset management, revenue rose 31% from a year earlier, helped by net inflows of 13.2 billion euros in the final quarter.

To help lower costs, Sewing is trimming the bonus pool at the investment bank by about 30%, people familiar with the matter have said. The bank is also postponing annual pay increases by three months to April 1, and the management board has offered to forfeit some of their bonuses.

For the CEO, the question of compensation is particularly acute this year as he tries to persuade top rainmakers to stay and defending market share in the investment bank.

--With assistance from Nicholas Comfort and Jan-Patrick Barnert.

To contact the reporter on this story: Steven Arons in Frankfurt at sarons@bloomberg.net

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

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