Deutsche Bank Hasn’t Changed Its Spots

Christian Sewing deserves a round of applause. Deutsche Bank AG’s chief executive officer has succeeded where a number of his predecessors failed, by restoring the lender’s profitability. The secret sauce? Well, there isn’t one really. The new Deutsche Bank looks very much like the old one.

On Wednesday the company reported 1.6 billion euros ($1.9 billion) in pretax profit for the first three months of 2021, its best quarterly result since 2014. Revenue surged 14% to the highest since 2017, despite Germany’s biggest bank having retreated from entire lines of business such as equity trading.

Deutsche is finally back on a path to making money for investors (and not just the employees who’ve continued to earn juicy bonuses over the years). A return on equity above 7% means the firm is on track to meet its 2022 targets. And it’s achieved all that while strengthening capital. At 13.7%, its common equity Tier 1 ratio — a key measure of financial strength — is almost one percentage point higher than a year ago, when the pandemic was just starting to take lives and wreak havoc on economies.

But scratch below the surface and, as I’ve written previously, you’ll see that Sewing’s two-year restructuring hasn’t moved Deutsche very far in where it does its business. The firm was meant to become far less reliant on volatile and risky investment banking, but that’s still by far the biggest profit engine — driven largely by fixed-income trading. Pretax profit of 1.5 billion euros from the investment bank dwarfs the bank’s three other three main activities: the corporate bank, the retail unit and asset management. Those three divisions combined generated less than half of the investment bank’s pretax profit in the quarter.

Like its Wall Street peers, Deutsche has been benefiting from the wall of money that central banks have injected into the world’s economies and investor wallets. But the company also says it’s been regaining market share lost before Sewing’s reorganization took hold. That could explain why its fixed-income trading revenue surged 34% in the first three months of 2021, twice the 17% gain recorded by U.S. rivals.

Significant caution around the sustainability of this trading business is still warranted. The recent implosion of Archegos Capital Management, the family office whose derivatives bets backfired spectacularly, is a reminder of the dangers to investment bankers when markets are this frothy.

In fairness, Deutsche dodged this particular bullet — not only did it not lose money on its Archegos loans but it was able to return collateral to the client — and it’s selling its equity prime brokerage business (the bit that lends to hedge funds and catered to Bill Hwang) to France’s BNP Paribas SA. But the financing of customers’ trading is still core to Deutsche. This activity, along with credit trading, was so strong in the first quarter that it helped offset a decline in the buying and selling of currencies and emerging-market debt.

Deutsche may be keeping capital in the investment bank steady, but how it’s allocating risk-taking within the unit is pure guess work from the outside. Fabrizio Campelli, the Deutsche executive taking over the running of the investment bank, might want to take a look at how it has been winning market share.

He’ll need to tread carefully because the unit’s profits are still so important to the bank’s overall wellbeing. Cost-cutting has been one of Sewing’s unquestionable successes, but it’s no longer a lever that Deutsche can rely on as much. While the firm is sticking with a 2022 target of 16.7 billion euros in adjusted costs, that has become more challenging after an increase in expenses.

For now, Sewing gets the benefit of the doubt. A better outlook for 2021 — he expects revenue to be flat this year after warning earlier of a decline — helped boost the bank’s shares, which rose more than 9% to their highest point in almost three years. But taking Deutsche back to where it started is an approach that carries real risks.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.