Deutsche Bank Posts Banner Quarter After Escaping Archegos Loss

(Bloomberg) --

Half-way through his restructuring of Deutsche Bank AG, Chief Executive Officer Christian Sewing took a big step toward convincing investors that Germany’s largest lender is no longer just a “show-me” case.

The bank on Wednesday raised its outlook after beating Wall Street traders for a third straight quarter. The performance handed Sewing the strongest profit in seven years and fueled the biggest jump in the shares in almost a year. And in a quarter that left many competitors blindsided by the collapse of Archegos Capital Management, Deutsche Bank -- once infamous for lapses in controls -- steered clear of the carnage. Even long-term skeptics were impressed.

“We have a sell rating,” said Andrew Coombs, an analyst at Citigroup Inc., “but nonetheless have to commend the company on an impressive quarter.”

Income from buying and selling debt securities rose 34% in the first three months of the year, compared with an average 17% gain for the largest U.S. investment banks. The performance prompted Sewing to predict that he’ll be able to match last year’s strong revenue, even as trading gains are expected to slow. The CEO has seen his two-year-old turnaround plan kept alive by soaring investor demand for corporate bonds and hedges that fueled a boom in the investment bank, while the lending businesses that he sought to strengthen struggled amid negative interest rates.

Shares of Deutsche Bank rose as much as 9.5% and traded 9.3% higher at 12:48 a.m. in Frankfurt, bringing gains this year to 24%. Analysts welcomed the result, while cautioning that the unusual support from the trading business is bound to peter out.

Deutsche Bank “has reported not only better-than-expected results in all divisions, but also the cleanest set of results of any global investment bank in our coverage so far,” Kian Abouhossein and Amit Ranjan, analysts at JPMorgan Chase & Co., wrote in a note. “Guidance and targets for 2021 are improved and ambitious, which we welcome.”

The analysts, and even some Deutsche Bank executives, had called the bank a “show-me” stock at the time Sewing took over, saying the CEO first needs to show he can deliver on his turnaround plan after many years in which prior management teams failed to deliver. They said they kept their “neutral” rating on the stock because the bank still had a “long way to go” to reach its profitability target.

Chief Financial Officer James von Moltke said in a Bloomberg Television interview that the support from the trading business was bound to slow. “We see encouraging ongoing activity,” he said, though “we would not expect a similar pace to the first quarter” in the three months through June.

Von Moltke also signaled that the bank’s plan to cut adjusted costs to 18.5 billion euros this year has been upended by higher levies for the European fund for winding down failed lenders, along with costs for the fallout from the collapse of Greensill Capital. Those “uncontrollable” items will add about 400 million euros to expenses this year. The bank doesn’t plan to offset them to avoid jeopardizing needed investments.

Still, net income of 908 million euros ($1.1 billion) in the first quarter was the highest since the start of 2014, beating analysts’ estimates. Deutsche Bank also benefited from lower provisions for credit losses as the economic outlook improved. The investment bank saw revenue rise 32%, driven by the gain in fixed income trading, which was better than all Wall Street peers with the exception of Morgan Stanley.

Revenue at the corporate bank declined 1% from a year earlier, though it rose 2% when adjusting for currency swings as Deutsche Bank passed on costs from negative rates. At the private bank, revenue was flat in euros and up 2% after excluding the effect of currencies. Both businesses have been hit hard by Europe’s negative interest rates.

As part of his 2019 turnaround plan, Sewing had sought to refocus Deutsche Bank on its historical strength in corporate lending while exiting equities trading, including the prime brokerage business that caters to hedge funds. While the bank still had some exposure to Archegos, it was among a handful of lenders to Bill Hwang’s family office that were quick enough to exit those positions without losses, Bloomberg reported earlier.

Von Moltke confirmed in the interview that the bank incurred no losses and was able to return excess collateral to Archegos.

“We’re very pleased with the way our risk management functions functioned through the process, both in advance of the market events and then in the liquidation and managing through that event,” he said.

On Tuesday, UBS Group AG announced a surprise $861 million loss from Archegos, while Nomura Holding Inc. disclosed a $2.9 billion hit. Credit Suisse Group AG last week put the cost of its relationship with the former hedge fund manager at $5.5 billion, the worst toll among global banks. It’s now planning a sweeping overhaul of the prime business and has tapped investors for fresh capital.

At the two Swiss banks, the Archegos losses overshadowed what was otherwise a strong quarter for investment banking, including for advising on initial public offerings for so-called special purpose acquisition companies. Deutsche Bank, too, has gotten a boost because it’s among the few major firms that had a significant SPAC business long before it was fashionable.

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