ii view: Deutsche Bank suffers hefty loss

Deutsche Bank restructuring charges see the struggling banking giant falling into the red.

Second-quarter results

• Net revenues €6.2 billion, down 6%
• Net loss of €3.1 billion (Q2 2018: €401 million profit)
• 'Strategic transformation' charge was €3.4 billion

Chief executive Christian Sewing said: "We have already taken significant steps to implement our strategy to transform Deutsche Bank. These are reflected in our results. A substantial part of our restructuring costs is already digested in the second quarter. Excluding transformation charges the bank would be profitable and in our more stable businesses revenues were flat or growing. This, combined with our solid capital and liquidity position, gives us a firm foundation for growth."

ii round-up:

Deutsche Bank AG (XETRA:DBK) has a significant presence in Europe the Americas and Asia Pacific. It provides both consumer and institutional banking. It operates over 2,000 branches with around 1,400 in its home market in Germany (March 2019).

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

Deutsche's asset management business, DWS, was floated in early 2018 and the company appointed Christian Sewing as its new chief executive in April 2018. 

In early July this year, the company 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. It is also establishing a so-called 'bad bank' to hive off poor performing assets. 

Second-quarter results saw the impact of costs or charges relating to its previously announced restructuring impacting the numbers. A loss higher than analyst expectations was reported. Excluding charges for restructuring, profit fell to €231 million from €401 million in the second quarter of 2018. 

The share price fell by over 4% in early 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. Deutsche Bank was slow to react, and a true appraisal of its position appears to be still ongoing. 

For shareholders, the result has been a deteriorating share price, down over 30% in the last year alone. Action to scale back its investment banking business appears sensible, though, and there is potential share price upside here if management makes a good job of fixing the business. However, 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 and, given a number of false dawns at Deutsche over the years, investors may want to wait for concrete evidence of a recovery before taking action.

Positives

• Management has acted to transform and refocus operations
• Transfer of assets to a bad bank lets management focus on core bank
• US business passed Federal Reserve's 2019 stress tests

Negatives

• Bank is becoming less diverse
• Talk of monetary easing by European Central Bank implies weakness in Deutsche's key markets
• Cuts in US and/or European interest rates broadly considered bad for banks

The average rating of stock market analysts:

Sell