Deutsche Bank’s Long Trading Slump Deepened in Run-Up to Revamp
Deutsche Bank’s Long Trading Slump Deepened in Run-Up to Revamp
(Bloomberg) -- Just a few weeks into Deutsche Bank AG’s biggest restructuring yet, the complications are already starting.
Germany’s largest lender on Wednesday posted the worst second-quarter trading result of the big Wall Street banks. The bottom line was below expectations after a 3.4 billion-euro ($3.8 billion) restructuring charge. In an interview with Bloomberg Television, finance chief James von Moltke signaled that some turnaround targets may be harder to reach should central banks start to lower interest rates again.
“It does represent a revenue pressure for us and all of the banks if rates from here go down further,” von Moltke said. That “is a significant risk to us.”
Shares of the lender slumped as the comments underscored how little room for error Chief Executive Officer Christian Sewing has as he implements the biggest cutbacks yet to the investment bank, including the exit from equities trading. Virtually all of the big banks that reported earnings so far have warned that lower rates will squeeze income from lending, but nowhere is the impact more dramatic than at Deutsche Bank, which has tried and failed for years to return to more sustainable profits.
Deutsche Bank fell 3% at 12:10 p.m. in Frankfurt trading, after losing as much as 5.8% earlier.
Sewing is betting the bank’s future on the business of serving corporate clients, with a focus on Europe, while exiting equities trading and scaling back parts of fixed income. That leaves Deutsche Bank particularly exposed to lower interest rates, which squeeze lending margins. Like other European banks, it also had to contend with negative deposit rates, meaning it has to pay the European Central Bank to park excess cash there. Von Moltke said he’s counting on the ECB to provide some relief for banks, should it decide to lower rates further.
‘Very Aware’
As part of the turnaround, the bank wants to boost its annual revenue by 2 billion euros through 2022, helped by a “modest improvement” in rates. Von Moltke said earlier this month that a goal of lifting return on tangible equity to 8% in 2022 “is realistic given the interest rate environment we’re facing.”
“We provided a set of numbers,” von Moltke said on Wednesday. “As one always does, one has to make some planning assumptions, those happened to be at the end of May and we are very aware that the outlook deteriorated during June.”
He said that if the ECB does lower rates, he expects it to shield commercial banks from at least some harm through tiering, in which some overnight deposits that banks park there are excluded or charged a less punitive rate. Failure by the ECB to do so could ultimately force the bank to lower its revenue expectations, it said in its quarterly report.
“Client retention risks, an unfavorable interest rate environment and negative secular trends across divisions present material headwinds to management plans,” Thomas Hallett, bank analyst at Keefe, Bruyette & Woods in London, wrote in a note. “These results do little to allay market concerns on the ability to deliver on those targets.”
Deutsche Bank posted a 3.2 billion-euro net loss for the second quarter, worse than it had guided at the time of the strategy announcement, as it booked a bigger chunk of the restructuring costs upfront. Adjusting for the charges, net income would have been 231 million euros, higher than management had indicated previously.
Speculation about the future of the investment bank compounded the impact of Wall Street’s worst first half for securities trading in a decade. Equities trading slumped 32% from a year earlier, and fixed income fell 11%. By comparison, overall trading at the five biggest Wall Street banks fell 8%. Swiss rival UBS Group AG on Tuesday reported a 9% slump in equities trading and 7% lower revenue from fixed income.
Losing Business
Deutsche Bank said it started losing business during the quarter as it became clear it would exit equities. Sergio Ermotti, the UBS CEO, said Tuesday that some of the balances from the German lender’s business are coming to his bank’s prime brokerage unit.
As part of its exit from equities, the German lender had agreed to transfer some 150 billion euros of balances linked to hedge funds to French rival BNP Paribas SA, but clients have been pulling about $1 billion of funds per day and going elsewhere as the firms iron out the details, people familiar with the matter have said. Deutsche Bank is planning to auction its equity derivatives portfolio and kick off the process in the coming weeks, a person familiar with the matter said.
At the global transaction bank, which Sewing is separating from the investment bank to make it the centerpiece of a new corporate bank division headed by Stefan Hoops, revenue was essentially flat when adjusting for a one-time gain a year earlier.
The German lender’s overhaul resulted in the departure of investment banking head Garth Ritchie. Sewing has taken over oversight over the division at the management board level while operational oversight has been split between Hoops; Mark Fedorcik, head of the investment bank; and Ram Nayak, in charge of fixed-income trading. Christiana Riley, who’s running the bank’s U.S. operations, will join the management board pending regulatory approval.
To contact the reporters on this story: Steven Arons in Frankfurt at sarons@bloomberg.net;Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net;Matthew Miller in New York at mtmiller@bloomberg.net
To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Christian Baumgaertel
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