ii view: Deutsche Bank makes a surprise profit

Does a shrinking investment bank now provide a conundrum for this German giant?

Third-quarter results to 30 September

• Net revenue up 13% to €5.9 billion
• Pre-tax profit of €482 million, up from net loss of €832 million
• Costs down 10% to €5.2 billion
• Credit loss provisions of €273 million

Chief executive Christian Sewing said: 

"In the fifth quarter of our transformation, we not only demonstrated continued cost discipline, but also our ability to gain market share. Our more focused business model is paying off and we see a substantial part of our revenue growth as sustainable. Our balance sheet strength and high quality risk management enable us both to support clients in challenging times and to take advantage of new business opportunities.”

ii round-up:

German banking giant Deutsche Bank (XETRA:DBK) today reported an unexpected profit, driven by buoyant bond and currency trading for its restructured and shrinking investment bank under the pandemic. 

Fixed income and currencies sales within the investment banking division rose by 47% year-over-year, leaving overall group revenues 6% ahead of City forecasts, and helping to generate a profit of nearly half a billion euros. Analysts had been expecting a loss closer to €180 million. 

Deutsche Bank shares were little changed in midday European trading having risen by more than 10% year-to-date. Shares for global rivals Barclays (LSE:BARC) and Citigroup (NYSE:C) are both down over 40% in 2020. 

In July 2019, Deutsche 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. 

Total costs at the bank fell by 10% year-over-year to €5.2 billion. Credit loss provisions made against the backdrop of potential Covid bad debts came in at €273 million, an improvement on the €761 million declared in the previous quarter.

The surprise profit was the bank’s first since early 2019. It now expects ‘significantly higher’ revenue from the investment bank, up from a previous forecast of ‘higher’. Analysts speculated as to whether the division had been taking market share from US rivals. 

The results came on the same day as the German government moved to retighten pandemic restrictions, imposing a one-month closure on bars and restaurants. 

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 is more recent. Having now outlined a strategy to become a simpler, more efficient, less risky and better capitalised bank, Covid-19 is another hurdle to overcome.  

For investors, evidence of progress under its transformation plan continues to surface. Gains in revenues and falls in costs both indicate management progress. These latest numbers mark its 11th consecutive quarter of cost reduction. But, as with rivals, further gains for investment bank under volatile Covid conditions cannot be guaranteed. An upturn in virus cases and a retightening of pandemic restrictions across much of Europe could also see bad debt provisioning again rise. In all, while progress is being made, further evidence of recovery is still required before sentiment turns convincingly in the bank’s favour. 

Positives

• Management action to transform and refocus its operations is being pursued
• A return to profit

Negatives

• The bank is moving to become less diverse
• Cuts in interest rates are broadly considered bad for banks

The average rating of stock market analysts:

Sell