ii view: Deutsche Bank surprises to the upside

Shares for this German bank are up in 2020 compared to losses for many rivals. 

Second-quarter results to 30 June

• Net revenue up 1% to €6.3 billion
• Loss of €77 million (£70 million), down from a loss of €3.3 billion last year
• Credit loss provisions of €761 million
• Non-interest costs down 23% to €5.4 billion

Guidance

• Expects full-year revenues to be flat compared to a previous decline

Chief executive Christian Sewing said: 

“In a challenging environment we grew revenues and continued to reduce costs, and we’re fully on track to meet all our targets. This enabled us to more than offset higher provision for credit losses
and remain profitable while supporting clients through difficult conditions. Our strong capital position not only demonstrates our resilience, but also gives us scope for growth."

ii round-up:

Deutsche Bank (XETRA:DBK) today reported a better-than-expected quarterly loss, aided by performance at its investment bank, along with improved full-year guidance.

Shares of the German bank rose by more than 3% in early European trading having stayed flat over 2019 compared to double-digit gains for rivals. But its shares are up over 10% year-to-date compared with losses of between a third and half for peers like Citigroup (NYSE:C), Barclays (LSE:BARC) and HSBC (LSE:HSBA). 

In July last year, 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. 

Non-interest related expenses during the period fell by 23% to €5.4 billion. Recent progress regarding its transformation included combining its wealth management and private & commercial international businesses and forming a partnership with Google Cloud.  

Like rivals such as Barclays, and aided by the full weight of global central bank action to buy financial instruments and ease conditions under the corona crisis, revenues for its fixed income & currencies business rose by 39% to €2.1 billion. Sales for the investment bank as a whole rose by 46% to €2.7 billion.

Credit loss provisions made against the backdrop of potential bad debts under the pandemic rose to €761 million compared to €506 million in the first quarter. 

The bank now expects full-year revenues to prove flat, an improvement from prior expectations of marginally lower. Second-quarter revenues rose by 1% despite the bank exiting global equities sales and 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 is far more recent. 

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

For investors, evidence of progress under its transformation plan is surfacing. A reduction in costs and gains in revenues both point in the right direction, but the backdrop for more change is challenging. Covid-19 is raising potential bad-debt provisions while hikes in interest rates – allowing widening margins between deposits and loans – look as far away as ever. That said, Germany has had a better Covid crisis than many other countries, such as the US. At this stage, despite some progress, Deutsche shares remain an investment for those with a higher appetite for risk.  

Positives

• Management action to transform and refocus its operations is being pursued
• Full-year revenue guidance improved

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