Deutsche Bank has slumped to its biggest quarterly loss since 2015 after the embattled lender took a hefty restructuring charge to shrink its investment bank.
Germany’s biggest bank took a charge of €3.4bn, just under half the expected total bill for an overhaul announced this month that will see 18,000 jobs cut, the lender’s balance sheet slashed and a bad bank created.
As a result, the bank was left with a net loss of €3.1bn in a quarter during which its investment bank, once the spearhead of Deutsche’s global ambitions, again struggled. It fell to a €907m pre-tax loss in the period as revenues fell 18 per cent.
“The second quarter illustrated the need for Deutsche to take action, but also that it is likely to be a long road until we have visibility on the many stepping stones . . . for returns to improve,” said Anke Reingen, an analyst with RBC Capital Markets. “Execution of the new transformation plan remains key.”
Even though the quarterly loss had been flagged, the shares dropped as much as 5 per cent before recovering to trade down 2.2 per cent. They remain down 33 per cent over the past 12 months.
Deutsche chief executive Christian Sewing is embarking on one of the deepest restructurings in banking history just as speculation builds that the European Central Bank will loosen monetary policy this year in an attempt to help the eurozone economy.
Should the ECB, which meets on Thursday, cut interest rates further into negative territory this year, this “could become more painful for us”, said one senior executive, echoing the caution from UBS on Tuesday.
Since the planned restructuring was revealed earlier this month, more than 900 employees have been told their jobs will go and progress has been made offloading equities clients and staff to French rival BNP Paribas, Deutsche said.
The bank is preparing the next round of cuts in rates trading and support functions, but declined to give more details. Deutsche said it had already jettisoned 13 per cent of the €288bn of risk-weighted assets earmarked for sale, resulting in a small gain for the bank.
However, the bank said it had second thoughts about hiving off operations generating €550m in annual revenue, and will now keep them in the investment bank. These businesses include “equities services provided to corporations” like “share repurchase programmes, selective margin lending”, according to chief financial officer James von Moltke.
Excluding the restructuring charges, net income for the quarter was €231m, while adjusted pre-tax profit came in at €441m, missing analysts’ estimates. Overall group revenue fell 6 per cent to €6.2bn.
While a hit to earnings was expected at the investment bank, performance still undershot expectations. Revenue from fixed-income trading, a historic strength for Deutsche, declined 11 per cent, worse than that of Wall Street rivals. Merger advisory and capital markets revenue fell almost a third, while the bank singled out its large leveraged finance business as disappointing.
“Revenue was particularly weak in the investment bank . . . [and] Deutsche does not expect the environment to materially improve in the second half of the year,” said RBC’s Ms Reingen.
At the global transaction bank, dubbed the “crown jewel” of the lender and the centerpiece of the new corporate-focused strategy, revenue fell 6 per cent to €949m. The bank’s common equity tier one ratio, a key indicator of balance sheet strength, dropped to 13.4 per cent compared with 13.7 per cent in the first quarter.
According to a person familiar with the plans, Mr Sewing will invest a quarter of his post-tax fixed salary into Deutsche shares. On Wednesday the bank disclosed the first such share purchase worth just under €22,000, with more and bigger trades planned over the coming months. As of February, Mr Sewing already owned Deutsche stock worth €500,000 and had share awards adding up to another €341,000.
