ii view: Deutsche Bank stuck in the red

Deutsche Bank is undergoing a major transformation, but investors remain on the side lines. 

Third-quarter results

• Total net revenues down 14.5% to €5.3 billion
• Net loss of €832 million versus profit of €229 million in Q3 2018
• On track to meet 2019 cost reduction targets

Chief executive Christian Sewing said: 

"Despite having launched the most comprehensive restructuring of our bank in two decades, we delivered profits in our four core businesses during the quarter and grew loans and assets under management. Transformation is fully underway with tangible progress on costs and de-risking."

ii round-up:

Operating over 2,000 branches globally, German bank Deutsche Bank (XETRA:DBK) reported a higher third-quarter loss than expected. 

A net loss of €832 million proved higher than the consensus estimate of €778 million (source: Refinitiv), although better than the €3.1 billion posted in the prior second quarter. 

In July it 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.

Under the new structure, the good or core bank made a pre-tax profit of €353 million after absorbing €315 million of restructuring and transformation-related charges. All four core businesses proved profitable in the period. 

The bad bank or capital release unit posted a pre-tax loss of €1 billion driven by the exit of non-strategic business and transformation costs. 

The share price fell by more than 6% in early morning stock market trading. 

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 to be still ongoing. 

For investors, the result has been a deteriorating share price. The shares are down around 20% in the last year alone and over 60% in the last five years. Action to scale back its investment banking business appears sensible. Battling Goldman Sachs (NYSE:GS) or JPMorgan Chase (NYSE:JPM), headquartered in the back yard of many of the world's biggest companies has always been a big ask. However, given a number of false dawns at Deutsche, investors may want to wait for concrete evidence of a recovery before taking action.

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
• Its US business passed the Federal Reserve's 2019 stress tests

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