A Deutsche Bank logo adorns a wall at the company's headquarters in Frankfurt, Germany June 9, 2015. REUTERS/Ralph Orlowski/File Photo
© Reuters

Deutsche Bank’s investment banking business continued its decline in the third quarter as Germany’s largest lender saw revenues in the division fall almost a quarter from a year ago to €3.5bn, the Frankfurt-based bank reported on Thursday.

The sharp drop in Deutsche’s corporate and investment banking division followed a similar fall in the second quarter, where its €3.6bn in revenues was well off analysts’ expectations of €4.1bn.

The new results were below analysts’ expectations, and shares fell 2 per cent in early trading. “The revenue environment remained challenging,” chief executive John Cryan said in a statement.

For the year, the bank’s core investment banking business of advising clients and helping them raise funds was down 24 per cent, underperforming its Wall Street rivals where there has been a 15.2 per cent rise.  

Deutsche performed far worse than the big five US banks across other businesses, including equities revenues, which were down 16 per cent, and fixed income revenues, which were down 36 per cent. Wall Street peers reported an average 2 per cent rise in equities revenues for the quarter and a 22 per fall in fixed income revenues.

The bank blamed the drops, in part, on a change in the fixed income and currencies divisions’ reporting structure, insisting the revisions overstated the decline. It said that on a like-for-like basis the year-on-year fall was 24 per cent and by and large in line with US peers. “The quality of results is poor”, JP Morgan analysts wrote in a note.

The bank said market headwinds and an adverse interest rate environment have hit performance hard. Much like the big Wall Street trading houses, Deutsche said client activity was more muted than a year ago and volatility was lower than in the third quarter of 2016, which saw frantic trading activity after the UK’s unexpected vote to leave the EU.

Deutsche said it did not expect a quick recovery in investment bank revenues, as muted trading activities and low volatility was likely to persist in the fourth quarter. Citi analysts flagged that the current consensus estimates on Deutsche’s full year earnings are likely to prove too optimistic. They expect “a mid-single digit percentage reduction in consensus earnings, driven by ongoing revenue pressures”. These headwinds, combined with little progress in capital ratios and the cautious outlook, may weigh on the shares, Citi warned in a note.  

Despite the disappointing revenues, the bank’s profitability recovered, with pre-tax earnings up 51 per cent to €933m, driven by cost cutting. The lender’s non-interest expenses were 14 per cent lower than a year ago, beating analyst expectations by 8 per cent.

At 4.5 per cent, the lender’s return on tangible equity during the quarter was almost twice as high as a year earlier. However, that remains well below the 10 per cent target Mr Cryan wants to achieve over the medium term.

“We have made significant progress on our key initiatives,” Mr Cryan said, pointing to the planned merger of Deutsche Bank and Postbank in Germany, and the planned listing its asset management unit.

In a strategic about-face in early March, Mr Cryan ditched an earlier plan to sell Postbank, deciding to fully integrate it into Deutsche’s own private and business client business instead.

The lender has spent the past eight months working on the integration plan, and Mr Cryan will name the joint management team for what will be dubbed Deutsche Privat- und Firmenkundenbank by the end of the year. In the second quarter of next year, Deutsche’s retail operations and Postbank will be merged into one legal entity. 

Deutsche expects the integration of its two German retail banks, which will have joint total assets of €275bn and more than 20m retail clients, will take up to four years. Over the short term, this move is likely to be a drag on earnings, with restructuring costs and investment outlays initially higher than cost savings. 

By 2022, cumulated restructuring costs and investment in modern computer systems and similar efficiency initiatives will add up to €1.9bn. Once complete, Mr Cryan expects the integration to boost Deutsche’s pre-tax profits by €900m per year, but the benefits will not show up on its balance sheet until 2022. 

The bulk of the synergies will come from cutting costs, the bank said, rather than cross selling. “We are convinced that the benefits of our efforts will step by step become more apparent in the coming quarters and years,” Mr Cryan said. 

Copyright The Financial Times Limited 2024. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article

Comments