Deutsche Bank warns of lower revenue as trading boost ebbs

Bloomberg

Deutsche Bank AG warned revenue will probably decline this year as a trading boost that lifted Wall Street banks in the first quarter fades and the coronavirus pandemic ripples through the economy.
The first quarter was flat from a year earlier as a 13% increase in fixed-income trading helped offset lower income in the corporate bank and asset management, and the impact from a decision last year to exit equities trading. But with the pandemic shaping up to be more severe than anticipated, the bank warned provisions for credit losses will “significantly increase” and suggested it may struggle to post a profit.
“As it relates to profitability, obviously this year will be tougher than we had initially assumed,” Chief Financial Officer James von Moltke said in an interview on Bloomberg TV. “But I will say relative to our planning we have come into the year with a better first quarter step-off than we had anticipated.”
Deutsche Bank joins firms including UBS Group AG in predicting there will be pain to come for banks as the trading rally fades and lockdowns to combat the virus drive up defaults. The pandemic hits Germany’s largest lender just as a turnaround plan announced last year by Chief Executive Officer Christian Sewing was gaining traction.
Deutsche Bank rose 3% in Frankfurt trading, paring losses this year to less than 5%. It hit a record low last month and has a price-to-book ratio that’s lagging well behind peers.
The bank’s trading result trailed the 31% average gain of the largest US peers, mainly because of weak credit trading. But the result was still better than analysts had expected and underscores a rebound at the investment bank, which still contributes most of the revenue at Germany’s largest lender.
“We had a solid performance in foreign exchange, emerging markets and rates while credit was impacted by the market conditions,” said Ram Nayak, head of fixed-income trading. “The foreign exchange market has normalised this month almost back to February levels. The rates market is staring to normalize whereas credit is still a very mixed picture.”
While traders benefited, many of the bank’s clients in the corporate bank are particularly exposed to the widescale lockdowns that have disrupted supply chains and demand at the same time. That unit — a key pillar of Sewing’s strategy — saw revenue decline about 1% in the first quarter.
The bank set aside 506 million euros to deal with souring loans, or 44 basis points of loans. It said it expects provisions between 35 and 45 basis points of loans for the full year. The number is low compared to the billions of dollars other banks have already earmarked for that purpose.

Deutsche Bank published some results already late Sunday, including better-than-expected revenue and earnings for the first quarter, confirming early indications that it’s turnaround was gaining traction just as the virus hit.
Sewing is cutting a fifth of the workforce and focusing the bank on corporate lending and debt trading. But after five years of losses, concerns about the lender’s strength linger as the world faces the deepest recession since the Great Depression.