Deutsche Bank warns of $365m hit as ruling adds to headwinds

Bloomberg

Deutsche Bank AG warned of a 300 million-euro ($365 million) hit after a German court allowed some clients to challenge higher fees, adding to headwinds for Chief Executive Officer Christian Sewing as he enters the second half of his turnaround plan.
Germany’s largest bank will book 100 million euros in provisions in the current quarter because of the ruling, and expects a combined revenue shortfall of 200 million euros in the second and third quarter, Chief Financial Officer James von Moltke said at a conference. The lender is also increasingly pessimistic that it can lower contributions to a European fund for winding down failed banks, he said.
The setbacks add to a number of stumbling blocks Sewing is facing, after an unexpected trading rally in the wake of the pandemic kept his turnaround plan on track so far. With unexpected costs popping up and support from markets expected to peter out this year, the corporate and retail units that were initially a focus of the CEO’s strategy will have to pick up the slack.
The April 27 court decision, in a case by a consumer rights group against Deutsche Bank’s Postbank retail business, stated that the bank gave itself too much power to unilaterally change terms and conditions and treat customer’s lack of response as agreement. As a result of the ruling, German lenders could see half of their annual profit wiped out by compensation claims, the country’s financial regulator has warned, complicating efforts to pass on negative interest rates by raising fees.
The hit from the court decision adds to some 200 million euros in unexpected costs that Deutsche Bank could be facing after predictions for lower contributions to Europe’s Single Resolution Fund didn’t materialize. Sewing already had to drop a guidance on expenses for 2021 because of that, and von Moltke said that he’s increasingly pessimistic about next year as well.
Bloomberg reported last week that Deutsche Bank has been one of the loudest voices in calling for a reduction in the levies to the bailout fund, though lenders have struggled to convince politicians of the merits of their case.
“The official sector, in various places, understands the intellectual arguments we have made as an industry around this levy but I don’t think there’s a political, you know, consensus, around making a change to that levy,” von Moltke said.
The unexpected hits come just as the trading rally that has lifted Deutsche Bank’s earnings over the past year-and-a-half is starting to slow. Von Moltke, who spoke at the annual European Financials Conference organized by Goldman Sachs Group Inc., said that the boost from markets had “normalized” in the second quarter, a trend that is expected to continue in the remainder of the year.
Despite such obstacles, the CFO said there were reasons to be optimistic. Deutsche Bank kept gaining market share in the investment bank, while provisions for bad loans this year may come in lower than expected. The bank’s current guidance is for a provisions of 25 basis points of the loan book, which would equate about 1.1 billion euros based on figures from the end of the first quarter.
Deutsche Bank has also become increasingly confident that it can pass on higher costs to customers despite the court ruling, and was prepared to lose retail clients over deposit fees, von Moltke said. The lender’s German retail unit, to which the ruling applies, had revenue of 1.2 billion euros in the second quarter of last year. The expected impact from the ruling on revenue will taper off by the fourth quarter, according to the CFO.