(Bloomberg Opinion) -- For a bank that’s in the middle of its deepest corporate restructuring in decades, the economic slump unleashed by the deadly Covid-19 pandemic couldn’t have come at a worse time. Yet Deutsche Bank AG, Germany’s biggest lender, had a remarkably strong first quarter, even posting a surprise profit. A buoyant start to the year at the investment bank, the company’s top revenue driver, will only numb the pain for a while.
In a Sunday-night statement reminiscent of some of Deutsche’s most turbulent years, Chief Executive Officer Christian Sewing raced out an early glimpse of its earnings. This time he had some good news for investors. Revenue — which has been under pressure as the lender shrank — held steady at 6.4 billion euros ($6.9 billion), a figure that exceeded even the most optimistic of analyst estimates by a wide margin. While details on the financials were scant ahead of Deutsche’s full earnings release on Wednesday, it seems that the bank’s traders did well, following their Wall Street peers, who had their best quarter in eight years.
The bank also delivered on its cost-reduction plans, hitting analyst estimates, and it said it remains on track to meet year-end objectives. But controlling expenses has become much more complicated in the pandemic era. The spike in revenue from securities trading will normalize now that investors have rebalanced their portfolios.
Deutsche is trying to reposition itself away from parts of the trading business and pivot back to its roots in corporate finance and trade finance. However, it remains to be seen whether this can be done successfully — especially at this time.
Sewing had pledged to cut almost 18,000 jobs by 2022, but last month he paused involuntary departures in view of the coronavirus outbreak and Germany’s broader need to protect the economy. While the bank may not be hiring many people during the pandemic, fewer will want to leave during the worst economic contraction since the 1930s. The additional cost will put pressure on trader bonuses and the investment needed across the firm.
The bank is abandoning some capital targets too. Gone is the objective for 12.5% of common equity Tier-1 capital. Deutsche expects that key metric of financial strength to fall temporarily below this level, but it didn’t say for how long or by how much — other than to say the fall would be modest. Its leverage ratio target for this year is also being jettisoned.
At 12.8%, Deutsche is comfortably above its new 10.4% CET1 requirement, determined by the regulators, but the upheaval caused by Covid-19 will increase its market and credit risk. Relative to its peers, Deutsche sits on one of the largest piles of risky assets to capital, a position that has never been tested to this degree. Clarity on what Deutsche called a “series of pending and proposed regulatory adjustments, which could improve the bank’s reported CET1 ratio” might ease concerns. Analysts aren’t expecting the bank to be profitable for the whole of 2020.
In the meantime, a 500 million-euro credit provision is hardly a bold acknowledgment of the risk. Italy’s UniCredit SpA, which has a similar sized loan book, is taking a 900 million-euro hit in the first quarter. Regulators have encouraged lenders to go easy on how much they set aside for souring credit, with the European Central Bank suggesting banks can assume an economic rebound this year in their calculations. Investors might be less sanguine.
More than most European bank bosses, Sewing needs to keep shareholders with him as he tackles the restructuring. A 13% bounce in Deutsche’s share price on Monday shouldn’t distract from the difficulty of his mission.
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Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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