Deutsche Bank Says Loan Provisions to Hit Eleven-Year High
Deutsche Bank Sees Surging Loan Provisions in Second Quarter
(Bloomberg) -- Deutsche Bank AG will set aside the most money in more than a decade to cover the cost of loans souring as Germany’s largest lender grapples with the economic collapse in the wake of the coronavirus pandemic.
Expenses to cover such losses are expected to peak this quarter at about 800 million euros, Chief Financial Officer James von Moltke said at a virtual conference at which he spoke together with chief risk officer Stuart Lewis. That would be the highest since the aftermath of the financial crisis and exceed the bank’s analyst consensus forecast of 630 million euros.
Deutsche Bank has been relatively optimistic about the outlook for soured loans when compared with peers, even with the higher-than-expected hit that it now signaled for the second quarter. Chief Executive Officer Christian Sewing has argued that his lending standards are high and the firm is less exposed to some of the worst-hit borrowers. He’s also being helped by some of the world’s most extensive government loan guarantee programs set up to combat the pandemic.
The lender kept intact its full-year guidance for provisions of 35 to 45 basis points of total loans and reiterated that it expects them to start declining next quarter. That’s roughly half of what French rival Societe Generale SA expects to set aside.
Deutsche Bank shares rose as much as 5.2% early on Wednesday before paring gains. After five years of losses and a long decline in the share price, it is the best performer this year among European bank stocks, following signs that Sewing’s latest restructuring is gaining traction.
Von Moltke’s guidance comes after the European Central Bank said the euro area economy may shrink 8.7% this year, with the worst of the contraction expected for the current quarter. ECB banking supervision head Andrea Enria has said banks should use that estimate as an “anchor” for provisioning in the second quarter.
Losing Years
Sewing has repeatedly said the bank’s capital buffers and liquidity position it well for the crisis. He’s also given a positive outlook on revenue from trading securities in the second quarter. Still, analysts expect the bank to post its sixth straight losing year in 2020, underscoring the uphill battle for the CEO.
Von Moltke on Wednesday reiterated the CEO’s positive outlook and indicated it applies to other units as well, including the corporate clients division. He pointed to strong lending as part of the German government’s loan program for companies as one reason. Deutsche Bank is an important channel for those loans.
The CFO also confirmed the bank’s medium-term target for a key measure of capital strength, even if that metric -- the so-called CET1 ratio -- may dip briefly below the 12.5% minimum the bank has set. The figure stood at 12.8% at the end of the first quarter. Von Moltke said it may decline by 20 or 30 basis points this quarter, which would likely be the trough.
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