Deutsche Bank Expects Quarterly Profit to Meet Expectations

(Bloomberg) -- Deutsche Bank AG’s third-quarter earnings may be a mixed bag, Chief Financial Officer James von Moltke suggested Wednesday.

While the bank expects its pretax profit to be broadly in line with a consensus forecast of 327 million euros ($385 million), its adjusted costs will exceed the estimate, Moltke said at an investor conference hosted by Bank of America Merrill Lynch in London.

Deutsche Bank, which long sought to compete with top Wall Street investment banks, is fighting to regain the confidence of investors and clients with a fourth strategic overhaul in three years. Chief Executive Officer Christian Sewing, after building a reputation for cutting costs at the bank’s retail unit, has staked it on an economy drive that includes at least four thousand job cuts by year-end and sharp reductions in non-essential travel, people familiar with the situation have said.

Von Moltke confirmed the bank’s goal to cut adjusted costs to 23 billion euros this year from 23.9 billion in 2017. But he added that the bank may do slightly worse than expected on this metric in the third quarter. Adjusted costs are likely to be a fraction above 5.5 billion-euros compared with a consensus estimate of 5.45 billion euros. The average forecast of analysts surveyed by Deutsche Bank is for pretax earnings to be down by around two-thirds from the same period a year ago.

In the second quarter, the bank had to release a statement ahead of time saying its earnings would be higher than expected. However, the difference was due largely to one-time factors and the bank’s share price has continued to struggle since then. It’s down 36 percent so far this year.

DVA Impact

At least one volatile factor will have a negative impact this quarter. The bank will have to price its debt higher to reflect an improvement in credit spreads that had widened substantially in the previous three months. Such debt valuation adjustments are rarely reflected in consensus forecasts, von Moltke said. This effect has had a negative impact on Deutsche Bank’s reported revenue in the past.

He gave few other details regarding the outlook, saying the bank wants to move away from the “perennial guessing game” of predicting its quarterly trading revenue, and instead focus on delivering what management has promised. The consensus forecast is for a year-on-year decline of 11.8 percent in third-quarter trading revenue.

One of Sewing’s top priorities is the integration of Deutsche Bank’s own-brand retail bank with Postbank, a politically sensitive process that will lead to thousands of job cuts over time. The process is “perhaps slower than we’d like,” von Moltke said.

“While we are making progress, we’re looking to accelerate the progress where we can,” he said, adding that “it’s a process that will take several years.”

Macro Risks

Deutsche Bank has taken longer than most of its global rivals to cut its investment bank. That has led some analysts to warn that it is more vulnerable to a downturn in global markets and the global economy. Von Moltke tried to downplay such concerns Wednesday.

“The market is getting ahead of itself with regard to concerns about the next downturn,” Moltke said. He said that the scenarios highlighted as the biggest risk factors by some economists are probably at least “two years out.”

“We run a very conservative balance sheet,” von Moltke said. “So from a capital perspective, from a liquidity perspective, we feel we’re running at a level that prepares us very well.”

Asked about press speculation over the possible need for a capital increase, the CFO declined to comment directly but said he’s “constantly amazed at what passes through the editorial filters and gets into the press” and there is “very little I can comment on, in terms of the fictions.”

©2018 Bloomberg L.P.