Deutsche Bank profits slide as trading revenue slumps and more cuts loom

German lender has lost about 43% of its market value this year

Nicholas Comfort
Wednesday 27 July 2016 13:01
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Deutsche Bank's investment banking division is Europe's largest but trading revenues have fallen
Deutsche Bank's investment banking division is Europe's largest but trading revenues have fallen

Deutsche Bank, which runs Europe’s biggest investment bank, said second-quarter profit was almost wiped out as trading revenue slumped and it set aside money to reduce jobs, with chief executive officer John Cryan signaling possible deeper cuts.

Net income decreased to €18m (£15m) from €796m a year earlier, the Frankfurt-based company said in a statement on Wednesday.

Analysts forecast a loss of €22m, according to the average of 11 estimates compiled by Bloomberg. The forecasts ranged from a profit of €524m to a loss of €1.8bn.

Mr Cryan, 55, has been cutting risky assets, freezing dividend payments and eliminating about 9,000 staff to boost capital levels and reverse a slump that has made the stock the worst-valued global investment bank.

His task has been complicated by mounting legal costs, record-low interest rates and volatile markets, with Brexit clouding economic prospects and potentially weighing on deal-making across the region.

“While our results show that we are undergoing a sustained restructuring, we are satisfied with the progress we are making,” Mr Cryan said in the statement. “If the current weak economic environment persists, we will need to be yet more ambitious in the timing and the intensity of our restructuring.”

Deutsche Bank has lost about 43 per cent of its market value this year. At about a third, the company has the lowest price-to-tangible book value of the world’s nine largest investment banks.

The discount indicates that it’s worth less than investors would expect to receive if the firm liquidated its assets.

Net revenue fell to €7.39bn in the second quarter from €9.18bn a year earlier, while risk-weighted assets fell 3.4 per cent to €402bn over the same period.

The cost-to-income ratio, a measure of profitability, was 91 per cent, up from 85 per cent a year ago. Restructuring and severance expenses surged to €207m in the second quarter from €45m a year earlier.

Deutsche Bank executives have struggled to reassure investors of its ability to increase its capital levels and pay coupons on certain debt securities.

The lender’s common equity Tier 1 ratio, a key measure of its financial strength, rose to 10.8 per cent at the end of June from 10.7 per cent three months earlier. That’s in line with analyst estimates in a Bloomberg survey.

Trading Slump

The company missed a goal of completing the sale of a 20 per cent stake in China’s Huaxia Bank. in the second quarter, a key step in raising capital levels.

That transaction will be completed in the second half, adding about 40 basis points to the capital ratio, according to the statement.

Mr Cryan has repeatedly said he doesn’t plan to sell shares, telling investors in May that the bank is making progress with its overhaul and that he is “convinced we can realise this transformation with our own funds”.

Deutsche Bank has raised €21.7bn from investors through three capital increases since the global financial crisis forced lenders from Commerzbank to Royal Bank of Scotland Group into bailouts.

It said it has begun discussions with the US Department of Justice on a potential settlement of claims based on the regulator’s investigation of the bank’s RMBS origination and securitisation activities.

With regulators stepping up scrutiny of riskier activities, the German lender pulled out of some capital-intensive businesses at the global markets unit run by Garth Ritchie.

Fixed income and currencies trading revenue, the largest source of income, fell 19 per cent to €1.82bn in the second quarter. That’s below the €1.95bn projected by analysts in a Bloomberg survey.

Postbank Profit

The five largest US investment banks saw their combined debt trading revenue rise 22 per cent in the second quarter from a year earlier, according to data compiled by Bloomberg.

Equity trading revenue slipped 31 per cent to €720m in the quarter from a year earlier, missing the €754m average estimate in a Bloomberg survey.

Revenue at the corporate and investment banking unit, which comprises underwriting and transaction banking and is led by Jeff Urwin, fell 12 per cent to €1.89bn, in line with analyst estimates.

Pretax profit from consumer banking and wealth management fell 61 per cent to €187m in the quarter from a year earlier, while the asset management business saw earnings decline 35 per cent to €171m.

The pretax loss at Deutsche Bank’s unit for winding down unwanted assets narrowed to €632m from €870m a year earlier, according to the statement. The Postbank division, which was earmarked for sale, reported a pretax profit of €179m in the second quarter, up from €88m a year earlier.

Deutsche Bank is among the first large European lenders to release second-quarter results. Credit Suisse, which also restructured its businesses, and France’s BNP Paribas are scheduled to report earnings on Thursday, followed by UBS on Friday.

© Bloomberg

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