Deutsche turnaround fizzles as lower rates loom longer

Bloomberg

Just a few weeks into Deutsche Bank AG’s biggest restructuring yet, the complications are already starting.
Germany’s largest lender posted the worst second-quarter trading result of the big Wall Street banks. The bottom line was below expectations after a $3.8 billion restructuring charge. In an interview with Bloomberg Television, finance chief James von Moltke signaled that some turnaround targets may be harder to reach should central banks start to lower interest rates again.
“It does represent a revenue pressure for us and all of the banks if rates from here go down further,” von Moltke said. That “is a significant risk to us.”
Shares of the lender slumped as the comments underscored how little room for error CEO Christian Sewing has as he implements the biggest cutbacks yet to the investment bank, including the exit from equities trading. Virtually all of the big banks that reported earnings so far have warned that lower rates will squeeze income from lending, but nowhere is the impact more dramatic than at Deutsche Bank, which has tried and failed for years to return to more sustainable profits.
Deutsche Bank fell 3 percent in Frankfurt trading.
Sewing is betting the bank’s future on the business of serving corporate clients, with a focus on Europe, while exiting equities trading and scaling back parts of fixed income. That leaves Deutsche Bank particularly exposed to lower interest rates, which squeeze lending margins. Like other European banks, it also had to contend with negative deposit rates, meaning it has to pay the European Central Bank to park excess cash there. Von Moltke said he’s counting on the ECB to provide some relief for banks, should it decide to lower rates further.
As part of the turnaround, the bank wants to boost its annual revenue by 2 billion euros through 2022, helped by a “modest improvement” in rates. Von Moltke said earlier this month that a goal of lifting return on tangible equity to 8 percent in 2022 “is realistic given the interest rate environment we’re facing.” “We provided a set of numbers,” von Moltke said. “As one always does, one has to make some planning assumptions, those happened to be at the end of May and we are very aware that the outlook deteriorated during June.”