Deutsche Bank slashes revenue outlook as merger talks collapse

Bloomberg

Deutsche Bank AG cut its outlook for full-year revenue after suffering its ninth straight quarter of contraction, underscoring the need to put Europe’s largest investment bank on a stronger footing following the collapse of merger talks with Commerzbank AG.
The bank said it expects business to be flat this year, after previously predicting a slight increase. Income from buying and selling securities fell 19 percent in the first quarter, worse than the average drop of 14 percent at its US competitors, handing the investment banking division its weakest first quarter since the financial crisis.
Deutsche Bank ended more than five weeks of talks about a historic tie-up with Commerzbank, saying such a deal would be too difficult to execute and wouldn’t justify the restructuring costs and additional capital requirements. The decision leaves Europe’s once dominant financial institution to come up with other options to boost profitability and revenue, while opening the door for European competitors to court Commerzbank.
Chief Executive Officer Christian Sewing declined to comment on the options he’s considering for the bank, insisting he won’t entertain further large cuts to its operations in the US and Asia.
“We will continue to review alternatives, as I said, that could potentially accelerate our existing objectives,” he said on a call. “Our non-negotiable starting point is that Deutsche Bank will remain a globally relevant financial services institution present and serving clients in the key geographies, and that includes the US and Asia.”
The main concern at Deutsche Bank has long been the investment bank, as both revenue and profit have been shrinking for years. It’s also been at the center of various legal scandals that have cost the banks billions of euros in fines over the years. The bank has since invested heavily in better control systems.
Sewing last year unveiled cutbacks to the division but many of the bank’s big investors have been disappointed that the cuts weren’t deeper, people familiar with the matter have said. Deutsche Bank said in early March it expects the division to report rising revenue this year, but the forecast is contingent on a benign economic outlook.
The results provide more detail on what drove the revenue slump in the first quarter, after the bank had given the key figures when it announced the collapse of the talks. Fixed income trading declined 19 percent from a year earlier, reflecting cuts to the rates business and difficult markets, and income from equities trading fell 18 percent, the release showed.
Fixed-income trading was “worse than global and European peers” and shows the bank “is losing market share,” Kian Abouhossein and Amit Ranjan, analysts at JPMorgan Chase & Co., said in a note. Deutsche Bank “may require long term further restructuring.”
Global transaction banking, a business within the investment bank that provides cash management and trade finance to corporations, posted a 6 percent increase in revenue, while the business of advising companies on deals and stock or bond issuance saw a decline. Revenue also fell in the private and commercial bank, which serves retail clients and small businesses and has been hit by low interest rates, as well as in asset management. Net income rose because of a lower tax burden.
Shareholder pressure may mount for Sewing to present a new strategy now that the talks have failed. The CEO has been working on a Plan B that would either be centered around accelerated cost cuts, including to the investment bank, or a strong strategic revamp that would result in upfront restructuring costs, people familiar with the matter have said.