Deutsche Bank’s Trading Boost Delays Loan Provisions Pain

(Bloomberg) -- Deutsche Bank AG relied on a trading boost and relief from regulators to soften the blow from the coronavirus pandemic, taking a smaller hit than most of its competitors.

But as the trading rally fades and the crisis worsens, the bank warned that revenue will probably decline this year and that loss provisions will peak in the second quarter.

Germany’s largest lender set aside just 506 million euros ($550 million) in the first quarter to prepare for an expected increase in bad loans, roughly in line with the amount at rival Credit Suisse Group AG. At Barclays Plc, that number stood at $2.6 billion while HSBC Holdings Plc earmarked $3 billion. U.S. peers set aside even more.

Deutsche Bank’s results are “going in the right direction,” analysts Kian Abouhossein and Amit Ranjan at JPMorgan Chase & Co. wrote in a note. “The question is if the provisions are enough.”

The pandemic hit just as a turnaround plan announced last year by Chief Executive Officer Christian Sewing was gaining traction. Sewing is cutting a fifth of the workforce and focusing the bank on corporate lending and debt trading. But after five years of losses, concerns about the lender’s strength linger as the world faces the deepest recession since the Great Depression.

The bank said it was applying guidance from the European Central Bank to look at the economic outlook over three years when provisioning for bad loans, rather than at a shorter-term impact of the pandemic, which is likely to be more severe. Regulators in Europe have encouraged lenders to be flexible applying rules to avoid a spike in provisions, recognizing that they’re not as profitable as their U.S. rivals.

“A good set of results, but expected credit losses are based on an ‘overlay’,” wrote analysts including Andrew Coombs at Citigroup Inc. That “seems a far less prudent approach” than peers.

Read more: European Banks Kick the Can Down the Road on Virus Losses

About half of Deutsche Bank’s provisions related to the outbreak. Spain’s Banco Santander SA, which is leading the pack in Europe, set aside 1.6 billion euros just for the virus impact. Italy’s UniCredit SpA is taking an additional 900 million euros in provisions for that purpose.

The relatively benign provisions helped Deutsche Bank post better-than-expected results on Wednesday. Yet with the pandemic shaping up to be more severe than anticipated, the bank suggested it may struggle to post a profit.

“As it relates to profitability, obviously this year will be tougher than we had initially assumed,” Chief Financial Officer James von Moltke said in an interview on Bloomberg TV. “But I will say relative to our planning we have obviously come into the year with a better first quarter step-off than we had anticipated.”

Sewing later said that the bank will use the lessons of the past four weeks -- where business travel has essentially fallen to zero and the vast majority of staff work from home -- to accelerate cost cuts. He said he will likely achieve bigger cost cuts this year than the roughly 2 billion euros previously promised.

Deutsche Bank rose as much as 9.4% in Frankfurt trading and was up 7.4% as of 3:39 p.m., recouping all of its earlier decline this year. The stock hit a record low last month and has a price-to-book ratio that’s lagging well behind peers.

Revenue in the first quarter was flat from a year earlier as a 13% increase in fixed-income trading helped offset lower income in the corporate bank and asset management, and the impact from a decision last year to exit equities trading.

The bank’s trading trailed the 31% average gain of the largest U.S. peers, mainly because of weak credit trading. But the result was better than analysts had expected and underscores a rebound at the investment bank, which still contributes most of the revenue at Germany’s largest lender.

“We had a solid performance in foreign exchange, emerging markets and rates while credit was impacted by the market conditions,” said Ram Nayak, head of fixed-income trading. “The foreign exchange market has normalized this month almost back to February levels. The rates market is starting to normalize whereas credit is still a very mixed picture.”

While traders benefited, many of the bank’s clients in the corporate bank are particularly exposed to the widescale lockdowns that have disrupted supply chains and demand at the same time. That unit -- a key pillar of Sewing’s strategy -- saw revenue decline about 1% in the first quarter.

“I feel very comfortable with our credit provisions, not least because a lot of our lending is to the German Mittelstand” which is benefiting from generous government aid, said Stefan Hoops, head of the corporate bank.

For the full-year, Deutsche Bank said it expects provisions between 35 and 45 basis points of loans. Hoops said provisions will probably peak in the second quarter.

©2020 Bloomberg L.P.