Deutsche Bank doubles down on traders as cost target scrapped

Bloomberg

Deutsche Bank’s traders kept Chief Executive Officer Christian Sewing’s overhaul alive when negative interest rates eroded income from lending. Now the CEO is counting on them to carry him to the finish line.
With Germany’s largest lender approaching the final stretch of his four-year plan, Sewing on Wednesday raised the revenue outlook on the back of another strong quarter in fixed-income. The boost should be enough to meet his key profit target next year, after the bank said it can’t lower costs as planned — the one area that seemed within the control of the CEO when he laid out his vision in 2019.
Deutsche Bank’s second-quarter results underscored just how much a strategy that initially was focused on cutting back trading and expanding lending has been turned on its head. While higher rates may yet give a lift to the corporate bank that Sewing sought to strengthen, it was once again the investment bank that propelled earnings, beating analysts’ estimates as well as Wall Street’s biggest investment banks in fixed-income trading.
“We see really bullish signs” on revenue, Chief Financial Officer James von Moltke said in an interview in which he also pointed to a strong performance in credit trading last quarter. “We also see much less of a headwind even in today’s interest rate curve,” he said. Revenue next year will exceed a target of 24.4 billion euros ($28.8 billion), Deutsche Bank said, while scrapping cost guidance for next year. It confirmed the central pledge Sewing made in his plan, a target for a return on tangible equity of 8% next year.
The bank said total unexpected expenses, including from higher contributions to industry funds and a recent German court verdict voiding some fee increases, will raise costs by about 400 million euros above its initial target of 16.7 billion euros for next year. It also cited the need to invest in controls, after confronting a growing list of legal and regulatory issues since the beginning of the year.
To some extent, however, the higher costs also reflect increased business volumes, and the higher pay that comes with those. While Deutsche Bank didn’t provide a new revenue target, von Moltke said on a call with reporters that its assumptions for costs, coupled with its target for the ratio of costs to income, would imply revenue of about 25 billion euros, around 600 million euros more than the bank’s previous guidance.
Much of that is being driven by its fixed-income traders, who saw a decline of just 11% from a standout quarter a year earlier. Deutsche Bank posted its highest share of fixed-income trading revenue since 2017, among the eight global investment banks that have reported second-quarter results so far. The German lender’s debt traders also topped Bank of America Corp’s for the first time in almost six years.

The biggest US investment banks on average saw fixed-income revenue drop 43% from last year’s second quarter, when global capital markets gyrated on the back of the Covid-19 crisis. At Barclays Plc, which also reported earnings on Wednesday, fixed-income trading fell 39%.
In April, Deutsche Bank already raised the outlook for the investment bank this year, saying that revenue for the unit and the bank as a whole would remain stable, after previously predicting a decline.
“Strong results across the board,” analysts Kian Abouhossein and Amit Ranjan at JPMorgan Chase & Co. wrote in a note to clients.
Sewing’s restructuring effort is set to last until the end of next year. The CEO sought to refocus Deutsche Bank on its historical strength in corporate lending while exiting equities trading and cutting jobs, particularly in the retail unit. But within months, he had to adjust assumptions for the lending businesses as expectations for higher interest rates were thwarted by a weak economy and later the pandemic.
In the corporate bank, revenue declined 8% in the second quarter, as income from lending slumped 34%. The private bank reported 3% higher revenue, led by 9% higher commissions and fees.
While revenue for the group is ahead of target, Deutsche Bank has been dealing with a growing list of legal and regulatory headaches this year that Sewing had sought to put behind him. It faces potential sanctions from the U.S. Federal Reserve for ongoing compliance failures, allegations of mis-selling foreign-exchange derivatives in Spain, an expanded mandate of the anti-money laundering monitor installed by the German regulator BaFin, and a new lawsuit alleging its controls failed to stop a Ponzi scheme in the U.S.