Deutsche Bank suffered its steepest drop since Christian Sewing's sweeping revamp in early July as its third-quarter results cast doubt on the chief executive's ability to arrest a long slump in revenue.
Germany’s largest lender, which is exiting equities trading and slashing a fifth of the workforce, saw income from its remaining businesses fall 4 per cent from a year ago. All but one unit suffered declines, including the fixed-income trading business that’s a historical strength of the lender, and where revenue slumped by 13 per cent.
Deutsche Bank shares fell as much as 7.1 per cent as the results underscored the uphill battle Mr Sewing (49) is fighting as he seeks to reverse years of revenue contraction and low profitability.
The CEO is exiting unprofitable trading businesses and focusing on traditional strengths, such as the corporate bank. But lower interest rates and a slowing economy have blindsided the CEO, while the investment bank is struggling to regain market share in debt trading after years of piecemeal cutbacks.
The new strategy marks the biggest cutback to the investment bank since Deutsche Bank built up the business in the 1990s. While top shareholders and regulators have signaled support, analysts have warned of execution risks. The bank already had to walk back a revenue target as the slowing economy made it unlikely that interest rates will rise soon.
Analysts were split on how to view the results. Kian Abouhossein at JPMorgan Chase highlighted the retail division's figures as particularly bad while viewing the performance of the investment bank, corporate bank and asset management as positive. Citigroup also focused on the private bank as a sore spot and noted "greater risk of revenue attrition" at the investment bank.
Michael Rohr at Moody's Investors Service said the ongoing reduction of unwanted assets was positive.
Among the bright spots was the corporate bank, which sells risk management and trade finance products to large companies. The unit, a key focus of Mr Sewing’s, saw revenue increase 6 per cent in the quarter. The business of advising companies on deals and raising capital reported a 20 per cent jump. The DWS asset management unit attracted €6.2 billion in new money, the third straight quarter of net inflows.
The bank managed to keep stable a crucial metric of capital strength known as common equity tier 1 ratio. Mr Sewing has promised to fund the restructuring without tapping investors for fresh money, instead relying on drawing down the bank’s capital reserves.
Deutsche Bank continued to make progress on costs, cutting its own metric of expenses excluding restructuring charges for a seventh consecutive quarter.
But the lender lowered the outlook for its largest unit, saying the private bank will see slightly lower revenue for the full year, after previously guiding that it would be unchanged. The bank said the drop in overall core revenue reflected headwinds from the restructuring, the global economy and lower interest rates during the quarter.
In rates trading, which is a unit of the investment bank, the decline would have been 10 per cent when adjusted for one-time factors, finance chief James von Moltke said on a call. Mr Sewing told employees in a memo that he expects that business as well as emerging market debt to stabilise soon.
“We are investing in these businesses, for example in electronic trading, and our momentum has been very encouraging recently,” the CEO said in a message to employees.
The performance in fixed-income trading compares with a gain of about 10 per cent reported by the large Wall Street peers. Among European investment banks, the results were uneven, with Barclays posting a 19 per cent gain while HSBC Holdings saw a 21 per cent slump in revenue from that business.
The division that trades fixed income securities was left largely unscathed in July, though the bank flagged at the time that it still wanted to scale back the business of trading interest rate securities. Deutsche Bank is currently putting the finishing touches on a review of the unit, Bloomberg reported this month, and considers cuts of at least 10 per cent of staff in the business.
In rates trading, investors buy and sell products such as government bonds and derivatives to profit or protect themselves from macroeconomic developments that affect interest rates. It’s distinct from credit trading, where participants buy and sell debts and derivatives to wager on a company’s ability to repay loans.
As part of the exit from equities trading, Mr Sewing moved assets from that business to a separate unit where they’re being sold or wound-down. He has sold the bank’s hedge fund assets to BNP Paribas during the third quarter in a deal that will unfold over several years, and he’s auctioned off various portfolios of equity derivatives. – Bloomberg
