Deutsche Bank seeks to break vicious circle

German lender reports lowest 3Q revenue since 2010, forecasts a decline for the full year


FRANKFURT • Just six months into the job, Deutsche Bank AG CEO Christian Sewing is conceding that the growth he promised remains elusive.

The German lender, reporting its lowest third-quarter (3Q) revenue since 2010, forecast a decline for the full year yesterday after earlier guiding for a flat result. At the same time, it backed away from a target of generating a return on tangible equity of 10% by 2021. After slashing costs and cutting jobs, Sewing told employees and analysts that the bank now has to increase revenue.

The Deutsche Bank lifer has staked his turnaround effort — the bank’s fourth in three years — on improving profitability by trimming costs and refocusing on fewer, core activities.

The continued contraction risks undoing Sewing in the same way that frustrated his predecessor, John Cryan: Without more revenue, no amount of cost cuts can turn around the 90,000+ employee operation.

Remain Concerned
“We remain concerned about Deutsche Bank’s inability to turn around” the investment bank division, JPMorgan Chase & Co analyst Kian Abouhossein wrote in a client note. “Deutsche Bank continues to lose market share against US peers reporting so far and most likely against some European peers,” in areas such as fixed income, commodities and currencies, he said.

Deutsche Bank fell 3.3% at 12:34pm in Frankfurt trading yesterday. The stock has lost 43% of its value this year and trades near its record low.

“Costs are in line with targets,” said Daniel Regli, an analyst with MainFirst who has a hold recommendation on the stock. “But there is continued weakness in investment bank revenue. That needs to be fixed.”

In the 3Q, trading income in the key fixed-income and currency division slumped 15% from a year earlier. Equities trading, where Wall Street banks on average posted gains, declined at the same pace. The business has been among the hardest-hit by executive departures recently. Still, the bank said it’s on course to have its first annual profit in four years.

The results are in stark contrast with UK rival Barclays plc, where CEO Jes Staley reported stronger trading results across the investment bank, sending that bank’s shares higher. Equity revenue surged 35%, beating even Wall Street peers.

“We made headway on our cost reductions,” Sewing wrote in a memo to employees. “On the other hand, we have not yet achieved a turnaround in terms of revenues.”

Vicious Circle
Sewing has vowed the investment bank will remain a core business for Deutsche Bank, with at least half of group revenue coming from the unit. At the same time, he’s cutting at least 7,000 jobs and retrenching in areas such as prime finance, US rates and corporate finance in the US and Asia. The bank cut another 700 positions in the 3Q after eliminating about 1,700 jobs in the three months through June.

That’s left the business stuck in what CFO James von Moltke has called a “vicious circle” of declining revenue, “sticky” expenses, a lowered credit rating and rising funding costs. The bank yesterday highlighted higher funding costs and geopolitical events among the headwinds for the securities unit, while the executive said that extended declines in the bank’s revenue may require greater cost cuts to make the 10% profit target feasible.

The investment bank’s origination and advisory business fared a little better, with a decline of 1%. Sewing said the bank won leading roles in six of the 10 biggest transactions by fee volume during the 3Q.

Garth Ritchie, who heads the securities unit, urged employees in a memo to “focus resolutely on rebuilding revenue momentum” in the final quarter.

Von Moltke said on a conference call that the bank wants to redeploy excess cash to return to growth, as restructuring expenses are likely to be lower than previously expected. He said rating companies would be comfortable with such use of capital.

“We need to end the year on a strong note,” Sewing wrote in his memo. “We’ll stay disciplined on costs, and we’ll turn around revenues.”