ii view: Deutsche Bank keeps losing money

Deutsche Bank shares have underperformed rivals. Is it now time to buy?

Fourth-quarter results

• Total net revenues down 4% to €5.35 billion
• Pre-tax loss of €1.3 billion, up from a loss of €319 million
• Core Bank: loss before tax of €437 million
• Cost reductions on track

Chief executive Christian Sewing said: 

“Our new strategy is gaining traction. Stabilising revenues in the second half of 2019 and our consistent cost discipline both contributed to better operating performance than in 2018. Our client business is developing well, right across the bank. With our strong capital position and a Common Equity Tier 1 capital ratio of 13.6%, we’re very confident we can finance our transformation with our own resources and return to growth.”

ii round-up:

In July, Deutsche Bank (XETRA:DBK) announced plans to pull out of global equities sales and trading, scale back investment banking and slash thousands of jobs as part of a sweeping restructuring plan to improve profitability.

A strategy to become a simpler, more efficient, less risky and better capitalised bank is being pursued. 

Deutsche, which has a significant presence in Europe, the Americas and Asia Pacific, has established a so-called ‘bad bank’ to hive off poor performing assets.

In these latest fourth-quarter results, restructuring charges taken as a result of major changes once again impacted. 

A total of €1.1 billion in transformation charges and restructuring and severance expenses contributed to a quarterly loss. The bank’s staff numbers fell by more than 4,100 during 2019.

Underlying or adjusted profitability proved broadly in line with analyst estimates, while strength in its balance sheet or capital position exceeded forecasts. 

The bank’s share price in late day trading following the results gained by more than 3%.

ii view:

Early action to take losses, restructure, rebuild the balance sheet and decide on what the new focus will be following the 2008 financial crisis was taken by many US and UK banks. For Deutsche, true appraisal of its position appears far more recent. 

For investors, the outcome has been disappointing. The share price is down more than 60% in the last five years and was little changed during 2019 compared to double-digit gains for rivals such as Barclays (LSE:BARC) and Citigroup (NYSE:C). Action to scale back its investment banking business appears sensible. Battling Goldman Sachs (NYSE:GS) or JPMorgan Chase (NYSE:JPM), headquartered in the backyard of many of the world’s biggest companies, has always been a big ask, and investors will likely be tentative given a number of false dawns at Deutsche.

Positives

• Management action to transform and refocus its operations is being pursued
• The transfer of assets to a bad bank should allow great management focus on the core bank
• Common Equity Tier 1 capital ratio of 13.6% beat analyst forecasts

Negatives

• The bank is moving to become less diverse
• Further easing action by the ECB suggests weakness in many of its markets
• Cuts in US and or European rates are broadly considered bad for banks

The average rating of stock market analysts:

Sell